Many tech stocks appeal to just a small subset of investors due to characteristics like a high dividend yield or exposure to a certain sector. Yet a few companies enjoy much-broader appeal -- usually because they have a defensible leadership position in a market that's central to broader industry growth.
We asked three Motley Fool contributors to narrow down the universe of tech stocks to a few companies that could comfortably fit in a wide range of portfolios. Here's why Netflix (NFLX -9.09%), American Tower (AMT 0.17%), and Facebook (META -4.13%) topped that list.
Image source: Getty Images.
Binge on market-beating returns
Demitri Kalogeropoulos (Netflix): The home entertainment industry is going through a fundamental shift that's likely to play out over years, if not decades. And streaming-video giant Netflix, set to pass 100 million paying members this year, is positioned to reap huge rewards from the global move away from broadcast, appointment-based television.
The latest trends suggest the industry is closer to the start of this change than to the end. After all, Netflix's subscriber growth sped up to 19 million users last year from 17 million. And those impressive gains came despite a price hike that forced every U.S. member to reconsider whether the service was worth an extra few dollars per month. The vast majority of them decided that it was, and so Netflix set a new profitability record in 2016 to go along with its market-thumping membership growth.
I won't argue that shares are cheap, given that they're valued at over 300 times the $187 million of profit the company booked last year. Its $63 billion market capitalization, after all, puts it nearly on par with Time Warner, whose $4 billion of net income is almost 60% of Netflix's annual revenue. But there's no more attractive choice for tech investors who want a front-row seat as the home entertainment industry moves from channels to apps. "Changes of this magnitude are rare," CEO Reed Hastings explains in the company's long-term view. So are stocks like this one.
Something for every investor
Anders Bylund (American Tower): If you're not familiar with the name American Tower, you are not alone. The company is in the business of building or buying cellphone towers, then leasing out space for wireless network operators in need of cost-effective connection points. The tower-management industry as a whole flies under the radar of many investors
For income investors, American Tower offers a tax-efficient REIT structure and a respectable 2.1% dividend yield. It doesn't hurt at all that the company funnels just 46% of its cash flows into dividend checks -- there's plenty of room for payout boosts there.
Value hunters may recoil at first, driven back by American Towers' sky-high price-to-earnings ratios. Keep in mind that the company is set up to pay minimal taxes, which inevitably leads to skinny bottom-line profits. Back out the accounting gymnastics necessary to report annual pre-tax income of just $1.1 billion in 2016, and you'll arrive at $2.0 billion in free cash flows or $3.4 billion of EBITDA earnings. Base your valuation metrics on these cash-backed figures instead, and the nosebleed inflation melts away.
And of course, growth investors like yours truly could also talk some sense into those grumpy value specialists. With free cash flows doubling in just three years, American Tower is now digging for high-growth business opportunities in places like India and Latin America.
Since a picture says a thousand words, let me just leave you with this beautiful rainbow of growth trends to ponder. Notice that the gap between rising cash profits and minimal net income has only increased over time:
AMT Free Cash Flow (TTM) data by YCharts.
The world's most popular social network is here to stay
Steve Symington (Facebook): Facebook stock currently trades near all-time highs. But given the unrivaled strength and network effects enjoyed by its fast-growing global platform, I think it would be a mistake to assume shares of the social media giant can't continue to climb from here.
For one, Facebook grew its total monthly active user base 17% year over year in 2016, to a staggering 1.86 billion, while mobile monthly active users climbed 21%, to 1.74 billion. Daily active users weren't far behind, climbing 18% last year, to 1.23 billion, and demonstrating just how engaged Facebook users have become. And though the core platform is free -- and always will be, as the company has promised from the beginning -- Facebook effectively demonstrated its ability to monetize that base (primarily through advertising) with revenue last year climbing 57%, to just shy of $26.9 billion. Net income also nearly tripled over the same period, to $10.2 billion. All the while, Facebook generated more than $11.6 billion in free cash flow in 2016, ending the year with no debt and $29.4 billion in cash and investments on its balance sheet.
What's more, consider that roughly two-thirds of the world's more than 7 billion people still don't have access to the internet -- something Facebook is striving to change through its Internet.org initiative. As those users continue to flood online, and as Facebook keeps delivering on its mission of connecting people and building a global community, I think investors will be handsomely rewarded if they buy the stock now and watch its story continue to unfold.
