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Last December, Motley Fool writers chose their Top 5 Tech Stocks for 2010. The recommendations shared one theme: platforms.
As 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."
Each of the stocks picked had key platforms their success is based on:
- Akamai (Nasdaq: AKAM ) is the world's leading content delivery network with more than 73,000 servers to make all aspects of customers' web pages load quickly. This may not sound like much, but a study by Google (Nasdaq: GOOG ) showed that a half-second decrease in its load time results in a 1.2% loss of revenue per user, with hundreds of millions of users that adds up.
- Apple (Nasdaq: AAPL ) has the Mac, iPhone, iPod, iPad and app and music stores to service them all.
- Google (Nasdaq: GOOG ) has the world's most popular search engine coupled with the world's best advertising machine. With the cash to gobble up any start-up to fill new niches Google is the dominant Internet business.
- SanDisk (Nasdaq: SNDK ) makes memory chips, most notably solid state drives, as smartphones require more memory SanDisk will be there to satiate them.
- Tibco Software (Nasdaq: TIBX ) is a key component of the cloud data industry. They run software that connects divergent applications into one cohesive IT network that works.
You're probably wondering though just how well . Here's the return's of the great stocks our writer's singled out for 2010:
Outperformance vs. S&P 500
|Apple||Rec||66.7%||+54.2%||Rick Aristotle Munarriz|
|Rec||(0.5%)||(13%)||Rick Aristotle Munarriz|
|TIBCO Software||Rec||135.6%||+123.1%||Anders Bylund|
|Average||82.3%||+69.8%||Motley Fool Writers|
Source: Yahoo! Finance. *S&P 500 returned 12.5% from Dec. 17, 2009, to Dec. 10, 2010.
Congrats to our writers for slaughtering the market! Even when compared to the tech-heavy Nasdaq-100, a common benchmark for tech funds -- which returned 23.8% -- our picks better than doubled it. So what about 2011? 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.
An example is your local electric company; it has power lines connected to your house and all your neighbors' houses. If you want electricity, you have to buy it from them. It would be nearly impossible for a competitor to come in and take your business away from them. It has you as a guaranteed customer as long as you live there, and is thus regulated like all get out.
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.
So what's new in platforms ...
- Tech startups Twitter, Facebook, and Groupon have created thriving ecosystems for others to innovate on which competitors are beginning to salivate over.
- E-readers have begun really catching on with Amazon's Kindle coming down in price and Apple's iPad taking off. There's now even talk of disposable e-readers coming in the future.
- Netflix (Nasdaq: NFLX ) is doing big things with its online offerings, expanding its digital library and adding subscribers.
- Baidu (Nasdaq: BIDU ) has taken more market share from Google since the latter decided to leave the Chinese mainland. Its dominance over the Chinese search market looks unbeatable.
The coming year
If you are looking to invest in tech, platforms are the way to go. Just remember to be on the lookout for new platforms and you might just have the next best tech stock.
If you want Our Top 5 Tech Stocks for 2011, check back on Fool.com this Tuesday, Dec. 14 at 11 a.m., when we announce our five picks for the new year.
Can't wait for some picks? Click here to access the Fool's free special report, "The Only Stock You Need to Profit From the NEW Technology Revolution."