Microsoft (NASDAQ:MSFT), Mastercard (NYSE:MA), and Alibaba (NYSE:BABA) are very different businesses, but they do share one thing in common: the potential to reward investors with long-term growth. Three Motley Fool contributors weigh in on how managing mountains of data, the war on cash, and increasingly wealthier emerging markets could lift these stocks in the coming decades.
A big company with big opportunities
Todd Campbell (Microsoft): It's no longer about a PC on every desk. Now, it's about technology that allows individuals and businesses to compile, access, and analyze data faster and more comprehensively.
Information is increasingly being distributed across devices, rather than constrained within silos, and Microsoft's solutions, including cloud computing, artificial intelligence/machine learning, and unified experience -- such as entertainment-anywhere initiatives -- could make this already giant company even bigger in the coming decades.
Investors are already beginning to see the benefits of Microsoft's investments in these areas. In fiscal 2018, Microsoft generated $110.4 billion in revenue and $35.1 billion in operating income, and it returned $21.5 billion to investors via dividends and share buybacks. Its commercial cloud sales exceeded $23 billion; revenue for Azure, its hyperscale cloud, nearly doubled; and gaming revenue surpassed $10 billion for the first time in company history.
Momentum isn't slowing, either. In fiscal Q1 2019, revenue surged 19% to $29.1 billion, operating income grew 29% to $10 billion, and earnings per share skyrocketed 36% to $1.14. Those are remarkable growth rates given Microsoft's size.
Overall, Microsoft has proven it can adapt and capitalize on opportunities -- known and unknown -- and that makes it one stock I think should be in just about everyone's long-term portfolio. The fact that it has among the deepest pockets in technology or that it pays a dividend doesn't hurt the case for buying it, either. Exiting last quarter, it had $136 billion (yes, billion) in cash and investments on the books, and currently its shares yield a respectable 1.8%.
Will cash ever die?
Nicholas Rossolillo (Mastercard): According to the 2018 World Cash Report published by multinational security services firm G4S, the vast majority of transactions around the globe are made in cash. That's especially the case in areas where banking and technology infrastructure are limited. Though printed money is ancient technology, the use of cash rises as wealth and economic development increase.
Forms of electronic payment are rapidly on the rise, too -- when taken in context of the thousands of years currency has been in existence, electronic transactions are still a fresh idea. Enter Mastercard, a household name and worldwide leader in digital payment processing. The plastic money company -- which earns a cut for simply facilitating a transaction rather than lending money itself -- has an enterprise value of $190 billion as of this writing. It also has a staggering operating profit margin of 54.3% through the first three quarters of 2018. Those two items paired together could be reason enough to make Mastercard a core portfolio holding.
Mastercard is proof that big doesn't equal boring, though. With digital transformation only just beginning in many countries, there is plenty of growth left in the tank. During the third quarter of 2018, gross dollar volume (the total value of transactions) was up 13% from a year ago, leading to a 15% increase in revenue and 36% increase in earnings per share.
Earning a fee every time someone swipes a card (or makes a transaction online) bearing the Mastercard name is a simple business model, but it's worth noting that model could suffer during global economic downturns. Growth depends on transaction volumes rising, and during economic slumps those tend to decline. With worry that a worldwide slowdown is beginning, that may give some investors pause on this stock. Nevertheless, with digital transformation just beginning, the global economy should continue to edge higher on average over the decades. That makes Mastercard a stock worth buying and leaving alone for the long haul.
Short-term pain, long-term gain
Jamal Carnette, CFA (Alibaba): Alibaba shares have had a disappointing run of late. Shares have declined 19% over the last year as Chinese macroeconomic concerns have spooked Wall Street. Instead of viewing this with apprehension, long-term investors should view this as an opportunity to buy a multi-decade growth story at or near the cheapest valuation in years.
The buy thesis is rooted in favorable demographics providing tailwinds to growth: The Brookings Institution estimates by 2020 China will surpass the United States in middle-class consumption -- $6.8 trillion -- with 16% of total spending. Increases in consumption and Internet usage follow middle-class growth, and Alibaba's on the forefront of both trends with its online commerce marketplace site and its rapidly growing cloud-computing division.
There are certainly risks: In addition to macroeconomic concerns, Alibaba faces increased e-commerce competition from JD.com. Additionally, all Chinese companies are subject to hostile regulation from a communistic government. It is my opinion these risks have been overstated and are more than reflected in the stock price.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Jamal Carnette, CFA has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Alibaba Group Holding Ltd. and Microsoft. Todd Campbell owns shares of Mastercard and Microsoft. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends JD.com and Mastercard. The Motley Fool owns shares of Microsoft. The Motley Fool has a disclosure policy.