In life, rituals help us mark time. Celebrating the new year is one of those rituals. It's an event that reminds us to review our life -- to take stock of where we are. As an investor, it's healthy to review your portfolio once per year, and now is as good a time as any.
Within my own portfolio sit three mega-cap companies ($500 billion or more in market cap) that I would recommend investing in as the calendar turns over. They share a few crucial characteristics: financial fortitude, sustainable competitive advantages, and a history of innovation.
Image source: Getty Images.
Don't sleep on Facebook
It's pretty easy to be a naysayer when it comes to Facebook (FB +2.33%). The company has been the butt of many jokes -- and the topic of much discussion in Washington -- since the 2016 election. The younger generation seems to be going elsewhere for their social media needs. Heck -- I rarely check my own timeline these days.
But you can't deny the power of the company's network. Yes, there's Facebook. But it also owns Instagram, WhatsApp, and Messenger. There are over 2.45 billion monthly active users (MAUs) across these products. And the platforms have a wide moat thanks to network effects: A social media platform is only worth using if the people you know are also on it, and no other company has more of the world's inhabitants on its platforms than Facebook.
Chart by author. Data source: SEC filings.
That allows it to gather incredible amounts of data that it can use to offer up targeted ads. How valuable are those ads? Over the past year, Facebook has brought in over $66 billion in sales and almost $20 billion in free cash flow. Its net cash position: over $40 billion.
And it can do a lot of things with that cash. Some scoff at the company's attempts to develop the Libra cryptocurrency. However, while those efforts seem to be running into opposition, investors need not be disheartened. I see this as just one example of the many ways Facebook can leverage its network to create new opportunities. Even if Libra fails, having a captive audience of over 2 billion gives you lots of options. Even without knowing which ones Facebook might pursue, I hold its shares because of their potential.
A change in leadership won't slow this titan
Alphabet (GOOG +1.00%) (GOOGL +1.11%) co-founders Larry Page and Sergey Brin made waves recently when they announced they'd be stepping away from day-to-day operations at the tech giant best known as the parent of search leader Google.
But I don't think that will hurt the company one bit. Like Facebook, Alphabet has billions of captive users. It has nine different products that each has more than 1 billion users: search, Maps, Chrome, Android, Google Play Store, Google Drive, YouTube, Gmail, and Google Photos. Almost all of those services are offered to users free, but Google collects data from each and uses it (like Facebook) to offer targeted ads.
If you think the numbers from Facebook were impressive, consider Alphabet's. Over the past year, it has collected $155 billion in revenue and $28 billion in free cash flow. Its net cash position: $119 billion.
It's putting that money to work in new and interesting ways. The company originally became "Alphabet" as part of a restructuring that more clearly separated its internet services businesses from the others, and gave the non-core units more autonomy. These include subsidiaries focused on such life-altering technologies as self-driving cars (Waymo) and extending the human lifespan (Calico).
Alphabet is worth owning for its advertising business alone. These side projects are the cherry on top. If even one of its innovative moonshot projects becomes a big hit, it could meaningfully affect returns for long-term investors -- and it has the ability to fund many of them.
So many moats
Famed investor Charlie Munger quipped in 2009 that Google had the widest moat ever. Ten years later, I'd argue that Amazon (AMZN +1.93%) can now lay claim to that title.
Let's start with low-cost production: Amazon has hundreds of fulfillment centers inside the United States -- and hundreds more internationally. This huge network of centers allows Amazon to guarantee fast delivery for a lower internal cost than the competition could ever hope to match.
It can then leverage this network by fulfilling orders for other companies. The amount of revenue Amazon gets from simply fulfilling orders from third-party vendors -- not even selling its own products -- has boomed over the past five years.
Chart by author. Data source: SEC filings. 2019 figure is for the 12-month period ending Sept. 30, 2019.
But it doesn't stop there. Consider the other moats:
- Brand: According to Forbes, Amazon's brand is the fourth-most valuable in the world
- High switching costs: Not only would it be very difficult for consumers to find a better deal than Amazon Prime, but companies that set up their cloud services on AWS are likely locked in for the long haul.
- Network effect: As more companies list their goods on Amazon.com, more customers are drawn in, leading to more merchants -- a virtuous cycle.
There's no telling what business Amazon might focus on next, but there are two things I know: Amazon CEO Jeff Bezos is one of the shrewdest business people of our time, and his company has the money (free cash flow of $20 billion over the past year) and infrastructure to make things happen.
Should you buy?
Just because I own shares of these companies doesn't mean you should. There are as many ways to build a portfolio as there are investors in the world. That said, I think all three are top stocks, and well worth your consideration and research.
And lest you think these are empty words: Amazon, Alphabet, and Facebook combine to account for more than 30% of my real-life holdings. That's a vote of confidence that's impossible to fake.
