When we talk about the stock market and the dominant companies within them, we tend to think of the US tech giants.
These include the top five largest companies in the US by market capitalisation; Facebook Inc (NASDAQ: FB), Alphabet Inc (NASDAQ: GOOG) (also known as Google), Amazon.com Inc (NASDAQ: AMZN), Microsoft Corporation (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL).
Undoubtedly, they are big for a reason. The companies’ products have been ubiquitous in our everyday lives, from e-commerce, gaming and smartphones, to social media, advertising and productivity tools.
Yet I view three of the tech giants as superior stocks to the others, mainly down to the optionality that they have versus the other two.
With that, here are the three giant technology stocks (all of which have a market capitalisation of over US$1 trillion) which I think long-term investors can buy and hold for the next decade.
1. Apple
The company behind the iPhone needs no introduction. Apple has been a dominant force in the smartphone and tablet industry for well over a decade – ever since the first iPhone was launched back in 2007.
Yet, since then it has turned its hardware into an all-encompassing software solution too as iOS as become one of the two dominant mobile operating systems in the world.
The size of the numbers speak for themselves. In the last quarter of 2020, Apple pulled in US$111 billion in revenue.
Although the iPhone still makes up over half of its revenue, Apple is fast expanding into other areas which have already seen success. These include music and video streaming, smartwatches (wearables) and payments.
As Apple expands, there are numerous other areas that it can leverage its sizable hardware and software dominance to enter or disrupt.
2. Amazon
Amazon started out as an e-bookstore and now pedals all sorts of goods in tens of countries worldwide.
Yet this e-commerce giant is actually making most of its money now from cloud computing. Its Amazon Web Services (AWS) division is enormously profitable and the clear leader in the global cloud computing market.
The insanely profitable margins of its AWS business means the company can continue to invest heavily in capabilities in its e-commerce business, as well as other areas of interest.
More recently, Amazon announced that it would explore offering its in-house telemedicine service to other companies.
When Amazon wants to expand into a new area, it usually has the clout and computing power to make a difference.
3. Microsoft
Finally, we have Microsoft – one of the veteran companies of the top five giants. Although it had fallen behind other tech companies in the 2000s and early 2010s, Microsoft has rediscovered a magic formula.
One big part of this was an early push into cloud computing, when AWS was the only other one already diving headfirst into the space.
This allowed Microsoft’s Azure cloud business to solidify its number two spot behind AWS, in terms of market share.
Furthermore, Microsoft’s move towards subscription pricing – in both its office suite of productivity tools and, now, its gaming (Xbox) business – means that its free cash flow is consistently large.
With three reliable divisions; cloud, gaming and office productivity, Microsoft is set to keep innovating and growing in each for years to come.
Optionality is the key
For all three of these companies, the differentiator between the trio and Facebook and Google, is that the former have the optionality to grow into new areas.
That’s crucial because a lot of the time, companies need to find those new avenues to keep growing both their revenues and profits.
As an example, Facebook last year derived 98% of its revenue from online ads. Meanwhile, Google (although not as reliant) still saw 80% of revenue come from advertising.
Admittedly, the advertising duo have other projects in the pipeline but there’s, of course, no guarantee of success.
Meanwhile, Apple, Amazon and Microsoft have already proven that their businesses can pull off optionality. In my opinion, that makes all three worth holding for the long term.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Microsoft Corporation.
