In the fast-changing world of tech investing, it might seem incongruous to talk about holding stocks for decades. The fact remains, however, that this approach is likely one of the surest paths to market-beating returns over the long term. The trick is finding companies that not only are the leaders in their respective fields, but are also developing products and services that could generate future growth.
With that in mind, here are three tech companies that hold significant positions in my own portfolio and that I believe will be beating the market for decades to come: Amazon.com, Inc. (AMZN 4.44%), Alphabet Inc. (GOOGL 0.92%) (GOOG 0.87%), and Apple Inc. (AAPL 1.41%).
Online sales is just the start
Amazon is riding one of the biggest trends around -- e-commerce. According to the U.S. Department of Commerce, online sales have skyrocketed over the last decade, growing from about 3.5% of retail to a whopping 8.9% of total sales. Amazon has been the biggest beneficiary of that trend, capturing 44% of all e-commerce sales in the U.S. last year, and an estimated 4% of all retail sales.
The company has opted to forgo much of its profitability to expand its ever-growing dominance, which would be reason enough to buy the stock, but the company has additional arrows in its quiver that will spur future growth.
Cloud computing represents another significant trend, one which the company initiated with the debut of its Amazon Web Services (AWS). Last year, AWS generated revenue of $17.5 billion, an increase of 43% year over year, while its operating income jumped 39% over 2016. What began as a sideline produced 10% of the company's revenue and all of its operating income last year.
Amazon's foray into the field of artificial intelligence (AI) is already yielding positive results, a trend that will likely continue as the technology becomes more widely used. Third-party research shows that customers who own an Echo smart speaker spend 66% more, on average, than other Amazon customers. AI helps to match customers with products and improves search results, and the company is now making the technology available to its cloud customers. AWS users looking to develop their own AI systems, like those that perform image or speech recognition, or language transcription or translation services will have access these services via Amazon.
Its sheer dominance of e-commerce, lead position in cloud computing, and growth potential in the field of AI make Amazon a must-have for any forward-looking portfolio.
Search and much more
Not many companies can boast of a product so well-known that it earns a spot in the popular lexicon as a verb, but that's exactly what happened with search leader Google -- and its supremacy in the field is undisputed. It controls 74% of the desktop search market worldwide, and a mind-boggling 93% for mobile.
The digital advertising that results from this search dominance is impressive. The company generated revenue of $110.9 billion last year, which grew 23% year over year, and its adjusted net income increased 22% over 2016.
Alphabet's Google entered the cloud-computing game late, but it has made impressive gains. On the company's most recent earnings conference call, CEO Sundar Pichai said that Google Cloud was "already a $1-billion-per-quarter business," as well as "the fastest-growing major public cloud provider in the world."
The company is also pursuing other opportunities that could drive growth. Google was one of the pioneers in the artificial intelligence technique of deep learning, which has led to a host of developments -- such as the tagging of photos on social media or speech recognition used by smartphones -- and while these improve existing products and services, the company has yet to find a way to significantly monetize these discoveries.
Alphabet is also home to a number of "moonshots" including Waymo, the company's self-driving division, which is close to significant monetization, as the segment is set to launch a driverless ride-hailing service later this year.
Its unparalleled control of search and substantial positions in both cloud computing and self-driving cars show why smart investors can hold Alphabet for decades.
Not just the iPhone
Apple has become synonymous with its flagship iPhone -- and with good reason. The device was responsible for nearly 62% of the company's revenue in fiscal 2017. While the iPhone accounted for only 18% of all smartphones sold in the fourth quarter, it accounted for 87% of the profits for the entire smartphone industry, according to calculations by Canaccord Genuity analyst Michael Walkley.
Some believe that the iPhone market may soon be saturated, but I think those fears are overblown, as demonstrated by customers' continued willingness to pay a premium for the device. Additionally, Apple has a total of 1.3 billion active devices out there, and the vast majority of those are iPhones -- and they'll all need to be replaced at some point. While growth may slow or even decline somewhat in the future, the iPhone will continue to provide the company with boatloads of cash flow.
Meanwhile, Apple is working to increase revenue from other parts of its business. The company aims to double the size of its services revenue to over $50 billion by the end of 2020, and recently cleared sales of $31.3 billion in the trailing-12-month period, up 19% year over year. If the company can continue at that rate, it will easily achieve this goal.
The company has also been focused on its "other products" category recently, particularly in wearables. Those products, which include the Apple Watch, AirPods, and Beats products, grew 70% year over year in the most recently reported quarter.
Apple also pays a dividend that currently yields about 1.5% and has a payout ratio of just 25%. It is widely expected that the company will announce a dividend increase in the coming weeks, when it reveals the annual update to its capital return policy.
Between its cash cow iPhone, notable growth in services and other products, and a strong and growing dividend, Apple is the definition of long-term buy and hold.
A small disclaimer
While I plan to hold each of these stocks for decades to come, that doesn't mean I'll be sticking my head in the sand. There aren't any guarantees that each company's growth plans will pan out, so any significant changes to the investing thesis may result in an unanticipated sale.
Each of these companies dominates a specific corner of the tech arena and has significant catalysts for growth. That's why I think they'll still be in my portfolio when I'm old and gray.