In a world marked by rapid change and disruption, picking winning stocks that are easy to understand can be a daunting task. It doesn't have to be that way, though.
Even in a complicated world, there are businesses out there so simple, anyone can understand how they operate. Not only is that a refreshing change of pace for investors, simplicity sometimes means a steady and predictable path to growth. Three businesses that fit in the simpler-is-better category, according to three of our Motley Fool contributors, are Mastercard (MA 0.07%), American Tower (AMT -0.70%), and Netflix (NFLX -0.63%).
The simplest of financial business finances
Nicholas Rossolillo (Mastercard): The tollbooth business model is simple: For the privilege of using a piece of infrastructure, one must pay a fee. That's how the cashless payments industry works. Users get the convenience and security of going cash-free, but a transaction fee must be paid for using the platform.
Mastercard is one of the oldest and most boring names in the business, but it's one sexy business. Revenues grew 9% during the first quarter of 2019, but earnings per share were up 28% due to a juicy 56.9% operating profit margin. Longtime rival Visa wasn't too shabby, either, with revenue and earnings up 8% and 17%, respectively.
Both electronic payment systems have a lot going for them, but Mastercard is especially worth a look, as its total volume of transactions is rising by double digits. Total volume rose 14% in 2018, and went up another 12% during the first quarter of 2019. The equation is simple: The more money that passes hands on Mastercard's platform, the more revenue and profits go up. It's a powerfully simple model, one that is yielding huge upside for investors as the world ditches cash.
Image source: Getty Images.
Easy peasy: Collecting rental fees for space in cell towers
Anders Bylund (American Tower): This business model is about as boring as they come. American Tower builds, buys, or leases cell towers and other points of presence for the equipment that powers radio stations and wireless phone networks. Then, the company turns around and leases out space in these communications sites to many types of customers, although most of the orders come from major wireless carriers. These contracts come with long-term commitments -- 57% of American Tower's current deals won't expire until at least 2023. This ultra-stable business comes with escalator clauses that increase the client's annual payments over time, and the whole package is wrapped in a real estate investment trust in order to minimize the tax costs.
Not boring enough for you? Well, American Tower is applying this proven American business model to a plethora of international markets nowadays -- more cell towers, more long-term contracts, more carefully considered tax strategies. By the end of the first quarter of 2019, American Tower managed more than 40,000 towers in the U.S. and 128,000 more across 17 foreign countries.
It's simple and boring -- and a fantastic cash machine that generated $2.8 billion of free cash flows from $7.5 billion of incoming revenues over the last four quarters. What's not to love?
A steady stream of sales and subscribers
Todd Campbell (Netflix): If you want to invest in a company you can understand so you can easily evaluate how the business is performing, you ought to consider owning Netflix.
An entertainment powerhouse, Netflix streams movies and television shows to 154 million subscribers worldwide, including 61 million in the United States. The company generates revenue by pocketing monthly subscription fees, and its biggest expense are the costs associated with creating its own content and licensing content from others, such as moviemakers.
It's a good business model. When Netflix licenses or creates content, it leverages it across existing and new subscribers, boosting margin and, in turn, earnings. In 2018, its subscriber revenue totaled $16 billion, up 35% from 2017, and its net income was $1.2 billion, up from $559 million the year before.
The business is so good that others are copying it, including Disney, which is launching its own streaming service this year. Competition shouldn't be ignored, but it's also not a new risk. For example, Hulu and Amazon's Prime have been operating successful streaming businesses for years, yet Netflix continues to grow. In Q1, its sales were $4.5 billion and its net income was $344 million, representing growth of 22% and 19%, respectively, from the same quarter last year.
Yes, there's a risk competition will cause subscriber growth to slow or negatively impact prices. Fortunately, Netflix's business model is simple enough to understand -- shareholders should be able to spot trouble by tracking changes in subscribers or average revenue per subscriber. As long as those figures are solid, owning Netflix could pay off.
