Can we all admit that Starbucks (SBUX 5.03%) has an incredible competitive advantage that few other businesses can replicate? There aren't many other companies that can say they sell an addictive product that is as loosely regulated as caffeine. Add to that a management team that has done a great job building its brand and business to the level few others have been able to achieve. With that in mind, it's going to be incredibly challenging to find another business that will generate the kind of returns Starbucks has generated since it went public.
In the spirit of trying, we asked three of our contributing investors to each highlight a stock they see as having the qualities needed to produce a Starbucks-like return. Here's why they picked NVIDIA (NVDA 0.80%) Dave & Buster's (PLAY 0.96%), and Canadian National Railway (CNI 1.68%).
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Why this chipmaker is poised for huge growth
John Rosevear (NVIDIA): Somewhere out there is a stock that will deliver the kind of returns that Starbucks investors have enjoyed since the 1990s. Lately, I've been wondering if NVIDIA will turn out to be that kind of stock.
NVIDIA is the leading maker of Graphical Processing Unit (GPU) chips, long popular with gamers and others who use graphics-heavy computer applications. GPUs have been a good business for a long time, but they're on the verge of becoming a great business: It turns out that GPUs are uniquely well-suited to artificial-intelligence (AI) applications -- and that means that demand for GPUs is about to explode.
Cloud computing, robotics, autonomous vehicles, and any other field in which you hear the phrases "deep learning" or "machine learning" -- that's all AI. All of those fields are either growing quickly or are expected to take off in the next few years. Translation: NVIDIA's addressable market has the potential to be enormous.
While NVIDIA has already staked out a substantial lead, it's likely to have fierce competition in at least some of those fields. Chip giant Intel (INTC +2.35%) isn't known for GPUs, but it just jumped into the autonomous-vehicle field in a big way by acquiring Mobileye, a well-connected (and well-established) maker of advanced driver-assist technologies that will be key to self-driving cars.
It's possible that NVIDIA will have to settle for second place in that field, as well as in some others. But take a broader view: Even second-place slices of several booming new markets could add up to huge bottom-line growth in coming years.
The games make the difference
Brian Stoffel (Dave & Buster's): I'm not sure that any chain can ever replicate the kind of success that Starbucks has had, but you don't need those types of returns to be a successful investor. Instead, we can take the lessons from Starbucks' growth and see where else it applies.
To me, the big differentiator with Starbucks was its focus on the in-store experience and Chairman Howard Schultz's insistence that it become America's "third place" to be, outside of home and work. Dave & Buster's has the same advantage working in its favor. With a mission to be customers' "first choice for frequent fun," and capitalizing on that by offering organized sports-viewing, as well as tons of games to supplement normal food and beverages, it is doing just that.
While much of the restaurant industry has faltered over the past two years, Dave & Buster's has been able to regularly produce same-store sales gains. It was the sixth-fastest growing restaurant in America last year, and according to Restaurant News, had the highest sales per unit of any operator in the industry at $11.7 million. With under 100 stores worldwide, Dave & Buster's will never hit the store count that Starbucks has, but there's still tons of room for growth.
An insurmountable competitive advantage that delivers great returns
Tyler Crowe (Canadian National Railway): One thing that stands out more for me than Starbucks' competitive advantage is the company's ability to generate return on capital. In a low-margin, lower-return business like food and beverage service, Starbucks has incredibly been able to generate returns on equity in excess of 25% over the past decade. That is what makes for a long-term wealth-building stock more than anything else -- a company that can take a major competitive advantage and turn it into high rates of return. Perhaps that's why Canadian National Railway has been able to generate similar results as Starbucks since it IPOed.
SBUX Total Return Price data by YCharts.
Canadian National Railway has two competitive advantages that will be almost impossible to replicate. One is that the cost to move goods over long distances by rail is orders of magnitude less than any other form of transportation. As long as we need to move stuff around North America, trains are going to be the go-to mode of transportation for bulk and heavy goods. The other is decades upon decades of investments in rail networks. Railways are an incredibly capital-intense business -- simply maintaining them and making minor expansions every year cost in the billions of dollars. With that much money at stake, it will be almost impossible for a new entrant to buy land or right-of-way rights -- much less develop a network that can compete with the existing players.
More importantly, though, Canadian National's management utilizes these advantages the best it can by running one of the most efficient rail operations in North America. Faster train speeds and lower idle times are more desirable for customers, and better asset utilization means more of that revenue filters to the bottom line to fund better service, dividends, and share repurchases.
Canadian National is probably never going to deliver incredible growth rates year over year and is probably not going to venture outside of North America. It doesn't have to, though. As long as it continues to incrementally build its network and deliver excess returns to shareholders, then Canadian National could have a good chance at replicating the success it has had for years to come.
