There are two ways to make money in the world: by rolling up your sleeves and working hard every day, or by putting your money behind well-selected stocks and watching your nest egg grow. Each has its own merits, but there's something to be said for an equal balance between the two.
The catch with investing is that it involves a lot of up-front work -- following a company, researching it and getting to know the industry -- which is followed by intentionally doing nothing for decades. Indeed, the toughest part of "buy and hold" is the "holding" part.
But we believe this approach will be the most successful for the vast majority of our readers. Buying and holding high-quality companies for the long haul can produce amazing results. Read below to find out why Digital Realty Trust (NYSE:DLR), Activision Blizzard (NASDAQ:ATVI), and Ellie Mae (NYSE:ELLI) are three favorites of these Motley Fool investors.
An investment on the explosive growth of data
Matt Frankel (Digital Realty Trust): One stock that I think has strong potential to double, triple, or do even better over the next decade is Digital Realty Trust, a real estate investment trust that invests in data center properties.
For one thing, not only has the need for secure, reliable data solutions exploded over the past decade or so, but it continues to grow at a breathtaking pace. In fact, Cisco projects that global cloud IP traffic will grow at a 30% annualized rate for the five-year period through 2020.
This will create soaring demand for data centers, and is a main reason why market absorption of new data center inventory has been extremely high. In fact, in Northern Virginia, a massive data center market, data center inventory is being absorbed three times as fast as it's being built.
In addition to the growth potential that remains in its existing markets, Digital Realty continues to expand its global footprint, most recently entering the Tokyo market in a joint venture with Mitsubishi.
The proof is in the numbers. Digital Realty's stock price has nearly tripled over the past decade, and the company has increased its dividend every year during that period. If the growth in the data center industry continues, there's no reason its next 10 years can't be just as great.
Growing into the undisputed leader in mortgage SaaS
Brian Stoffel (Ellie Mae): Ellie Mae is the software-as-a-service (SaaS) company behind the Encompass platform used in the mortgage industry. The platform aggregates information on a single application for everything from a mortgage lead, to finding financing and closing a deal. It is not only popular with real estate agents but banks, financiers, and others involved in the process -- like appraisers and title companies.
Two powerful forces provide a moat: high switching costs and the network effect. Banks, lenders and other organizations keep lots of mission critical data on Encompass, and switching away would be costly not only in dollars and cents but in man-hours and headaches. It also helps to connect disparate services, like the aforementioned appraisers and title companies. As more professionals join the network, others are more incentivized to join.
The company is experiencing a slowdown right now as refinancing has decreased with the potential for higher interest rates. But if your outlook is truly decades long, the main metric to watch is the number of seats added on the Encompass network. Last quarter, 8,100 seats were booked, bringing the total number of contracted users to over 234,000.
This is key because the company is continuing to gain market share. When either refinancing or home purchases reaccelerate -- which they're almost guaranteed to do at least once over the next decade -- Ellie Mae will be in a prime position to capitalize.
Gaming your way to market-crushing returns
Steve Symington (Activision Blizzard): Shares of Activision Blizzard are up 480% over the past five years (excluding dividends), including a nearly 70% climb over the past year alone -- a happy consequence of the company's propensity for consistently exceeding its own financial guidance each quarter. So it would be hard to blame investors for wondering just how much higher the $48 billion video game juggernaut can rise. But Activision Blizzard is also enjoying significant industry tailwinds that could further reward patient shareholders in the coming years.
To start, while earnings per share actually declined to $0.47 from $0.49 last quarter, note Activision Blizzard already boasts an enviable pipeline of game franchises on which it can continue to build, from Destiny to Overwatch, Hearthstone, World of Warcraft, and Call of Duty -- the last of which generated more than $500 million in worldwide sales with the three-day opening weekend for Call of Duty: WWII earlier this month. And that's not to mention the steady stream of mobile gaming hits from Candy Crush creator King Digital, which Activision Blizzard acquired in a $5.9 billion deal early last year.
Looking ahead, Activision is also set to launch the first regular season of its new Overwatch League in early 2018, capitalizing on the accelerating momentum of competitive video gaming events, or esports. According to market research firm Newzoo, roughly 385 million people will have watched esports this year, generating estimated industry revenue of almost $700 million. But those numbers are set to grow to nearly 600 million viewers and revenue of $1.5 billion by 2020, and it seems safe to bet the trend will only become more popular in subsequent years. With leading video game creators like Activision Blizzard continuing to reap outsized rewards in the process, I think investors willing to buy now should be more than happy as those trends play out.
Brian Stoffel owns shares of Ellie Mae. Matthew Frankel owns shares of Digital Realty Trust. Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Ellie Mae. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.