In December 2009, The Motley Fool's technology writers put their heads together and chose the five stocks they thought could be the Best Tech Stock For 2010. The overall theme was platforms. Tim Beyers wrote, "Great tech stocks are all the same. They generate high returns because they're platforms, generating support not only from their users, but also an entire ecosystem of partners and developers." Since then, the S&P 500 has lost 1.7%. On the other hand, the writers' recommendations have crushed the market.
If you had invested in an equal-weighted portfolio of the companies, your return would have been 38%, trouncing the market. There's still plenty of time left in 2010 for these stocks to do better or worse, but the theme of investing in platforms still holds true.
Why invest in platforms?
Warren Buffett likes to talk about moats, the competitive wall a company has built up over time to defend itself from competitors. Platforms matter because they make for some of the deepest moats out there. It's why people invest in Sirius XM (Nasdaq: SIRI ) ; it's the only satellite radio platform out there. If you want to add a satellite radio channel in the U.S., you have to go through it.
Another example is your local water company; it has pipes built underneath your house and all your neighbors' houses. If you want water, you have to buy it from them. It would be nearly impossible for a competitor to come in and take your water business away from them. It has you as a guaranteed customer as long as you live there, and is thus regulated like crazy.
Companies strive to have you locked in as a customer for life because it's wildly profitable for them. But they try to avoid the regulation part: Just ask Microsoft. That's why when a company's platform is challenged, it will defend it like mad. For instance, when Apple came out with its iPad and announced it would not support Flash but instead the open HTML 5 standard, investors were abuzz about what this meant for Adobe (Nasdaq: ADBE ) . It is estimated that 75% of all Web video around the world is in the Flash format (.flv). Flash is a huge part of Adobe's platforms division, a $180 million dollar business for Adobe. To have it disappear because large competitors got behind an open-source solution would knock 6% off the company's revenue -- not the end of the world, but 6% certainly is significant.
So what's new in platforms ...
Lots.
Foolish takeaway
If you are looking to invest in tech, platforms are the way to go. Whether it's Akamai with its network of 65,000 servers, Apple with its legions of apps and developers, or a smaller player like TIBCO, which connects internal networks to the cloud, remember to be on the lookout for new platforms and you might just have the next best tech stock.
So what do you think? Are these five still winners for 2010, or are there better places for your money? Let us know in the comments box below.
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