You might be shocked to hear that the average tenure of companies in the S&P 500 will shrink from 33 years to an estimated 12 years as soon as 2027. That's simply because technology and disruption have accelerated in recent decades, shrinking the life span of many companies. That's why picking stocks that will be doing the disrupting in the decades ahead is increasingly important. Finding those stocks is no easy task, but three Motley Fool contributors have ideas for you to consider: Axon Enterprise (AXON -0.08%), Aptiv PLC (NYSE: APTV), and Adobe Systems (ADBE -1.97%).
On the cutting edge of law enforcement
Jeremy Bowman (Axon Enterprise): For generations, law enforcement was a low-tech practice. Officers relied on things like ink fingerprints and Polaroid cameras, lacking the modern, digital tools that have become common in today's world.
Today, crime-fighting is much different, and one of the companies most responsible for hastening that shift is Axon Enterprise, the maker of TASER stun guns; body dashboard cameras; and cloud-based, digital evidence-management systems Evidence.com and Axon Records.
Axon is the market leader in all three of those categories, creating a potent combination of products and services as law enforcement agencies are increasingly looking to less-than-lethal weapons like TASERs and cameras to monitor officer encounters over concerns and outrage about police shootings and other such incidents.
Those products also easily connect to Axon's cloud-based data management system, allowing police departments to easily retrieve and store footage from a body camera or information from a TASER, like when and for how long it was discharged.
That combination of products and services has allowed Axon to deliver steady growth and has built a powerful set of competitive advantages and switching costs, as once agencies are up and running with data management systems like Axon Records and Evidence.com, it becomes costly and time-consuming to switch to a different provider.
The need for security and law enforcement will never go away, but citizens are demanding greater accountability from police departments after so many deadly shootings. Axon is the market leader in its product categories and offers an unmatched inventory of high-tech tools for law enforcement agencies. With lasting and strong demand for such products, the company should have decades of long-term growth and expanding profit margins ahead of it.
Driving the future
Daniel Miller (Aptiv): Businesses fail every day, and it's no simple task picking stocks that are positioned to thrive over decades. But the following sentence from Aptiv's CEO, Kevin Clark, should be music to investors' ears: "Aptiv is a technology company that will usher in the next generation of active safety, autonomous vehicles, smart cities and connectivity."
Many investors have overlooked Aptiv because its transformation has flown under the radar. Since 2014 the company has exited its hard parts businesses, which had little potential for differentiation and price increases, and spun off its powertrain business so the company was better able to pursue more lucrative opportunities. Aptiv has since invested in automated driving and data capabilities through acquisitions of Control-Tec in 2015 and nuTonomy in 2017, among others.
It's also added a number of accretive acquisitions to improve its scale and portfolio of electrical architecture business. In other words, unbeknownst to many, Aptiv has transformed from a less desirable auto parts supplier into a company focused on driverless vehicle and electrical technology, technologies that will be in high demand in the coming decades.
Consider that in 2018, automated driving, connected services, and non-automotive end market (think aero, industrial, etc.) had a total addressable market of $15 billion. Aptiv expects that to jump more than three times, to over $50 billion, by 2025. As Aptiv essentially develops the nervous system of electrical cars and the future products needed for a more connected world, the company is certainly a stock you can hold for decades as the driverless automotive evolution accelerates.
A software powerhouse
Brian Feroldi (Adobe Systems): Some modern software companies feature recurring revenues, dependent customer bases, sky-high margins, and large growth runways. That makes them ideal places to park long-term capital. One of my favorite software companies to invest in is Adobe Systems.
Adobe is best known for its creative products such as Photoshop, Illustrator, Acrobat, and more. Many of these products are considered to be industry standards, used daily by millions of creative professionals.
But there's more to Adobe than its creative products. The company has been buying and building new products that have helped it to gain a major foothold in the business analytics market in recent years. Products such as Adobe Marketing Cloud, the Adobe Analytics Cloud, and the Adobe Advertising Cloud enable businesses to create and manage marketing campaigns that helps them to win new customers.
When combined, these businesses have enabled Adobe to produce amazing financial results. Revenue is growing by more than 20%, net income is rising, and the business is pumping out free cash flow. Management is using the excess profits to buy back stock and make occasional acquisitions. Wall Street is applauding the prosperity by bidding up the share price to all-time highs.
Adobe's stock isn't cheap today -- shares are currently trading for 31 times next year's earnings estimates -- but I believe that it is worthwhile to pay a premium to become a part owner of great growth stocks. With Wall Street currently projecting 22% earnings growth over the next five years, I think this winner can keep on winning.