Finding, buying, and holding on to stock in companies that overcome challenges and overdeliver on promises, like Netflix (NASDAQ:NFLX), is a great way to produce market-beating performance. What stocks offer those characteristics today? Our Motley Fool investors think Boeing (NYSE:BA), Foundation Medicine (NASDAQ:FMI), and Twitter (NYSE:TWTR) fit the bill. Read on to see why they're keen on these companies.
"Returns" has two meanings
Rich Smith (Boeing): Name a stock that will put Netflix's returns to shame? How about naming a stock that won't?
I'm probably in the minority here, but I'm just not that impressed with Netflix's returns. Sure, on one hand, Netflix stock has nearly doubled over the past year and is up nearly tenfold in price over the past five years. But what has Netflix actually done to deserve those returns?
Not much, other than burn cash. Netflix ran nearly $2 billion into the red for free cash flow last year and burned 24% more cash than in the year before. The last time Netflix was truly cash-profitable was 2011, during the Obama administration -- the first Obama administration. Ultimately, I predict that lack of cash profits is going to catch up to Netflix, drag its returns back down, and return them to the mean.
No, rather than invest in Netflix, I'd much rather own a stock like Boeing, the returns on which are just as strong -- up more than double over the past year -- and that has the cash to back up its strong stock performance. In contrast to Netflix, which burned cash last year, Boeing generated $11.6 billion in positive free cash flow, its strongest performance ever. Boeing's doing this, by the way, while making sizable investments to fend off competition and keep itself relevant in the future, buying drone companies and studying electric-plane technology -- even buying a battery-development company last week.
If you ask me, buying Boeing at less than 17 times free cash flow is a much better bet than investing in Netflix. Whatever returns the latter company has racked up so far, in the long term, I think Boeing is simply a better investment.
Success may be in its genes
Todd Campbell (Foundation Medicine): Netflix has revolutionized the media industry, and its shareholders have been rewarded handsomely for that disruption. However, the company is maturing, and that suggests its revenue growth rate may slow. If so, then returns may trail faster-growing companies, such as Foundation Medicine.
Like Netflix, Foundation Medicine is revolutionizing an industry, but unlike Netflix, it's still in the early innings of doing it.
The company's tests give doctors insight into a cancer patient's genetic makeup so that they can use personalized approaches to battle non-small-cell lung cancer, colorectal cancer, breast cancer, ovarian cancer, and melanoma. Drugmakers also use their genomic tests to design new cancer drugs and to enroll the appropriate patients in clinical trials.
Currently, Foundation Medicine estimates that over 1 million advanced cancer patients could benefit from genetic screening annually, yet only 15% are being comprehensively screened.
I expect that's going to change soon, because the FDA recently approved Foundation Medicine's FoundationOne CDx, a comprehensive cancer test for solid-tumor cancers, and the Centers for Medicare and Medicaid Services is expected to issue a distinct reimbursement code for that test soon. The ability to comprehensively screen patients with one reimbursed test could send genetic testing mainstream.
If so, then this company's sales could be significant. Despite the relatively limited use of genomic screening, Foundation Medicine's revenue still jumped 31% year over year to about $153 million in 2017. And sales are accelerating, too. In Q3 2017, sales grew 45% year over year to $43 million, but in Q4 2017, sales grew 70% to $49 million.
Cancer drug giant Roche Holdings owns more than 50% of Foundation Medicine, and last month, Pfizer inked a deal to collaborate with Foundation Medicine on next-generation cancer drugs, so apparently, I'm not alone in thinking that this company's on to something big.
Turning the corner to profitability
Steve Symington (Twitter): Shares of Twitter have already more than doubled over the past year, but that's not to say it's a "growth stock" in the sense that most investors might think. Rather, Twitter stock most recently surged two weeks ago, after the social-media platform not only returned to modest top-line growth (revenue increased just 2% year over year to $732 million), but also generated its first-ever profit in the fourth quarter.
The underlying drivers of Twitter's outperformance are encouraging. Daily active users climbed 12% year over year, and monthly active users grew 4% to 330 million. But more importantly -- and though its core advertising revenue grew just 1% -- Twitter's ad engagements skyrocketed 75% year over year, while its cost per engagement simultaneously declined 42%. These trends are a happy consequence of Twitter's shift toward video ads and higher click-through rates, driven by its embrace of machine-learning algorithms to improve the relevance of tweets and advertisements it serves to users.
As Twitter builds on this momentum in the coming quarters, and with shares still trading at less than half their all-time high set shortly after its IPO just over four years ago, Twitter stock could continue to handsomely reward patient investors.