Institutional investors have certain advantages over retail investors. For instance, they typically employ teams of experienced analysts that can provide boots-on-ground coverage; they also tend to have far more capital at their disposal.
By comparison, the greatest asset a retail investor has is a long-term mindset. You don't have clients counting on short-term outcomes, so it's OK if your portfolio falls 20% (or more) during a given quarter. Of course, it never feels good to see your net worth tumble, but over longer stretches of time, high-quality stocks can outperform the market in a big way. That gives retail investors an edge.
With that in mind, we asked three Motley Fool contributors to pick tech stocks that are worth holding forever. Keep reading to see why MercadoLibre (MELI 2.58%), Microsoft (MSFT +1.58%), and Shopify (SHOP 0.12%) made the list.
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An emerging markets winner
Jeremy Bowman (MercadoLibre): There are two things I look for in a forever stock. First, the company has to be a leader in its market, and second, that market should have a long growth path ahead of it. As Motley Fool co-founder David Gardner might say, you want to find the top dog and first mover -- and MercadoLibre exemplifies both of those qualities.
The company is the leader in e-commerce and digital payments in Latin America, a market with tremendous potential for future growth, and management had the savvy to parlay its e-commerce leadership into a digital payments advantage, making moves like offering brick-and-mortar merchants point-of-sale devices under its Mercado Pago segment.
MercadoLibre's growth has been consistently strong once you strip out the currency exchange effects from places like Brazil. Revenue more than doubled in its most recent quarter to $1.7 billion with 72% growth in currency-neutral total payment volume and a 46% currency-neutral increase in gross merchandise volume to $7 billion.
In addition to online payments, MercadoLibre is also expanding into new business lines such as Mercado Envios, its logistics arm; Mercado Fondo, its asset management business; and Mercado Credito, its small-business lending division. Much like market darlings Square and Shopify, MercadoLibre is pushing beyond its core as an e-commerce company and becoming a large diversified fintech/e-commerce business, and it faces relatively little direct competition in Latin America.
MercadoLibre is profitable and its price-to-earnings ratio is well into the triple digits, but that's typical for a high-growth stock, and profitability should ramp up as its e-commerce and payments businesses mature. The stock has jumped nearly 3,000% in the last decade, but it still has plenty more room to grow.
The once- and future software powerhouse
Eric Volkman (Microsoft): It's hard to believe, but Microsoft is nearly 50 years old. The enormous power and vast resources it still holds will surely make it an important business in the tech world for at least 50 years more, in my view.
After all these years, and numerous technological advancements, Microsoft is still far and away the top operating system installed in desktop PCs, with a commanding 87.6% market share.
According to figures compiled recently by research company Gartner, the installed base of desktop PCs this year will hit nearly 500 million. When we consider that many of those machines packed with Microsoft's Windows operating system also have several of its Office modules installed, we can get a sense of the monstrous scale of the company's business.
Yes, the glory days of the PC are over, but operating systems for such machines are only one aspect of Microsoft's business. The company also draws billions of dollars in revenue from cloud computing, as well as subscription fees from compelling products like Microsoft 365 -- the successor to Office 365 -- and Xbox Game Pass.
In fact, for a company once known essentially for Windows and Office, and a clutch of far less successful products, Microsoft has done a good job of diversifying its business. Its revenue is more or less evenly divided among its three operating divisions (productivity and business processes, more personal computing, and intelligent cloud).
In short, these growth engines have helped the company expand rapidly in recent years. In the fourth quarter of fiscal 2021, revenue rose 21% over the prior year, reaching $46 billion. And net income according to generally accepted accounting principles (GAAP) rose even more quickly, by almost 50% to $16.5 billion. On the bottom line, the company's profit margin was nearly 36%.
Growth might decelerate a bit in the near future, but analysts believe Microsoft's headline results will continue to rise at double-digit rates. Collectively, Wall Street is forecasting 13% year-over-year growth in revenue for fiscal 2022, with per-share net income advancing by 15%.
Microsoft has also evolved into a very shareholder-friendly company. Recently it boosted its dividend by 11% and while that new payout still has a relatively modest yield of 0.9%, the company consistently raises it, and has more than enough free cash flow to maintain that habit for years. Microsoft also launched a share buyback program of up to $60 billion, another initiative that should create value for shareholders.
The future is bright for the U.S. tech industry, but it's especially luminous for Microsoft. With its involvement in so many high-margin businesses, the company looks like a smart investment for many years to come.
Image source: Getty Images.
The operating system for modern commerce
Trevor Jennewine (Shopify): Shopify's mission is to make commerce better for everyone. Its software helps merchants manage sales across physical and digital channels, integrating orders from online marketplaces, social media sites, and custom webpages into a single platform. Shopify supplements this functionality with other services, like payment processing, discounted shipping, and financing, providing merchants with an end-to-end solution for modern commerce.
Not surprisingly, that value proposition has helped it win customers at a rapid clip. In fact, Shopify now powers over 1.7 million businesses worldwide, and it's the most popular e-commerce software platform in the United States. That scale is a significant advantage, allowing the company to capture troves of relevant data. For instance, Shopify can surface insights for merchants regarding which website layouts and product categories are most appealing to buyers.
Last year, Shopify launched its consumer-facing mobile app, Shop. This product is designed to drive engagement by enabling buyers to discover brands, make purchases, and track orders. It also simplifies the shopping experience on mobile devices, and gives merchants access to automated marketing tools, helping them drive repeat purchases. More importantly, Shop already has 118 million registered users, 23 million of which use the mobile app monthly.
Collectively, Shopify's robust platform and merchant-centric growth strategy have translated into rapid growth. During the most recent quarter, Shopify processed record gross merchandise volume of $42.2 billion, up 40% over the prior year. In turn, revenue skyrocketed 57% to $1.1 billion -- this marks the first time Shopify has crossed the $1 billion revenue threshold in a quarter.
However, Shopify's market opportunity is still getting bigger. According to eMarketer, retail e-commerce spend will grow at nearly 12% per year through 2025, reaching $7.4 trillion by the end of that time period. With that in mind, I wouldn't be surprised to see Shopify reach a $1 trillion market cap a decade from now. That's why this tech stock looks like a smart long-term investment.
