Wall Street is often obsessed with the latest high-growth stocks, but many of the market's sexiest stocks might not be around after a few decades. Today, three of our Motley Fool contributors will take a closer look at a trio of stocks that could easily last for 50 years or more -- Facebook (META 2.99%), American Tower (AMT -0.50%), and Moody's (MCO 1.07%).
The world's top social network
Leo Sun (Facebook): Facebook's monthly active users (MAUs) rose from 100 million in the third quarter of 2008 to 2.23 billion in the second quarter of 2018, making it the world's biggest social network. Facebook's size gives it a natural defense against smaller rivals, while its other apps -- Messenger, WhatsApp, and Instagram -- lock users into its ecosystem.
Messenger, which Facebook is expanding into a stand-alone platform, topped 1.3 billion MAUs last September. WhatsApp, which appeals to mobile users seeking a no-frills messaging app, crossed 1.5 billion MAUs earlier this year. Instagram, which helps Facebook stay relevant with younger users, hit 1 billion MAUs in June. Facebook also has a firm foothold in the virtual reality market with Oculus VR.
Facebook's massive online population provides advertisers with a gold mine of user data for crafting better-targeted ads. That's why its business continues to generate incredible growth, with its revenues rising 47% and its earnings climbing 54% last year. Wall Street expects Facebook's revenue and earnings to grow another 37% and 33%, respectively, this year. Those are incredible growth rates for a stock that trades at about 20 times forward earnings.
Facebook can't maintain those growth rates forever. But over time, its ecosystem will expand into adjacent markets, and its business will evolve, which will help it squeeze out more revenues per user even as its MAU growth peaks. That evolution should continue for decades, making Facebook a great stock to hold for half a century.
The buildout starts now for a long term future
Chuck Saletta (American Tower): 5G cell service in testing showcases wireless internet speeds as fast as 4 gigabits per second -- way faster than most current consumer-grade wired, fiber-optic services. Speeds anywhere near that rate will make it possible to real-time stream ultra-high-definition programming on multiple screens at the same time.
The downside of 5G service is that the wireless signals it relies on only operate for a much smaller distance than older technologies before they stop working -- typically far less than a mile. That means more cell towers and more antennas are needed to roll out 5G service in any meaningful way. For every downside, though, there's an opportunity. For American Tower -- a real-estate investment trust that specializes in cell towers -- 5G represents an incredible opportunity to expand its footprint.
Unfortunately, on the anticipation of all of that opportunity for growth, American Tower's shares are not available cheaply. Its stock trades at 39 times its expected earnings, a level that anticipates several years of growth as 5G rolls out over time. Still -- for investors with a 50-year time horizon, it's comforting to remember that once that infrastructure rolls out, it will provide the backbone for what's sure to become "must-have" services.
A duopoly business that prints money
Jordan Wathen (Moody's): As one of the three biggest credit rating agencies, Moody's is in the fortunate position of selling a product its customers have to buy. When a company wants to borrow money by issuing bonds, it's almost a necessity that it goes to one or all of Moody's, Standard & Poor's (S&P Global), and Fitch to get a credit rating.
Rated bonds typically price at lower yields than unrated bonds. Thus, borrowers make the rational decision to pay a small amount of money for a credit rating in order to save a lot in interest expense. Because just two companies effectively control the industry -- Fitch is a very distant third to Moody's and S&P -- the three agencies aren't inclined to compete on price.
In addition to the ratings business, Moody's generates about one-third of its revenue from Moody's analytics, a segment that sells research, data, and software on subscription to operating companies, financial institutions, and investors. The analytics segment enables it to monetize the massive amounts of data it has accumulated on companies of all sizes -- even private companies.
Moody's is outlandishly profitable, boasting operating margins in excess of 45%. And because it's a business built on intellectual property, virtually all of its profits can be returned to shareholders each year in the form of dividends and repurchases without limiting its growth.
Over the long haul, I think Moody's can grow profits at a high single-digit clip, powered by growing debt issuance and widening margins driven by routine price increases. At a recent price of about 23 times its mid-point earnings guidance this year, investors can easily make the case that Moody's offers a lot of growth at a reasonable price.