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New Investor? Here Are 3 Great Starter Stocks

By John Ballard – Nov 20, 2021 at 7:40AM

Key Points

  • Alphabet is in a commanding competitive position with its suite of apps and services.
  • Apple produces tens of billions of free cash flow every year.
  • Netflix is about to turn a profitable corner with its market-leading content library.

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These companies are growth machines that should fuel returns for many years.

Buying and holding great companies over many years is an easy way to grow your money. Many overlook the power of compounding interest and how investing a few hundred dollars a month into the world's best businesses can turn a small seed into massive sums over a lifetime.

To give you some ideas, let's look at why Google parent Alphabet (GOOG -1.60%) (GOOGL -0.90%), Apple (AAPL 3.76%), and Netflix (NFLX 2.28%) would be three great stocks to lay a solid foundation for future returns.

A parent helping child place coins in a piggy bank.

Image source: Getty Images.

1. Alphabet

Google is one of the most valuable brands in the world. More than 2 billion users relied on Gmail, Calendar, Google Drive, and other productivity apps during 2020. Google Search is like a toll bridge to the internet, except advertisers, not users, pick up the tab. Alphabet generates 81% of its total revenue from advertising, which allows the company to deliver tremendous value to the consumer for free.

Selling digital ads is a very profitable business that provides plenty of funds to invest in exciting growth opportunities, which Google calls "other bets." One of these is the Waymo self-driving car project. Google is also one of the leading cloud-service providers for enterprise. Although Google Cloud isn't profitable for the company yet, it's third in market share behind Amazon and Microsoft, and positions Alphabet for plenty of long-term growth in the burgeoning cloud-services market. 

One characteristic that's important to look for in a good investment is a company's ability to produce steady growth in free cash flow, which allows the business to keep reinvesting in new opportunities. Alphabet generated a whopping $65 billion in free cash flow over the last year on $239 billion of revenue. That's more than double the amount of free cash flow it generated five years ago, which is a testament to Alphabet's ability to continue delivering great returns for investors over the long term.

Four Apple iPhones.

iPhone 13 Pro. Image source: Apple.

2. Apple

Google's Android operating system commands the lion's share of the smartphone market, but no phone maker has more customer loyalty than Apple. The history of this iconic brand could make a perfect case study of how a company can take a commodity product, and with attention to design, product packaging, and marketing, create a very powerful consumer brand that even wins the investment of Warren Buffett.

Along with Apple's knack for designing slick hardware, it also locks in users with a suite of services that make iPhones, Macs, and iPads work well together. While the iPhone is Apple's largest source of revenue, sales of digital services (e.g. Apple Music, App store, Apple TV+) remain one of its fastest-growing categories, bringing in $68 billion in revenue in fiscal 2021 through September.

Its top brand helps Apple sell products at premium prices, while reaping the benefits where it counts. In fiscal 2021, it generated $92 billion of free cash flow on $365 billion of revenue. 

The interest in upgrading to 5G iPhones should spark strong demand over the next year, and it's already off to a good start. Management reported seeing an "enthusiastic response" to the new iPhone 13 lineup on the fiscal fourth-quarter earnings call. iPhone revenue increased by 46% year over year in the September-ending quarter, which included the initial sales of iPhone 13.

All said, Apple's strong brand and growing installed base of 1.65 billion active devices make it a great investment for any investor.

A person watching TV with a bowl of popcorn.

Image source: Getty Images.

3. Netflix

Netflix has built the broadest lineup of originals of any streaming service, and that's reflected in its growing 213 million subscriber base. The stock has been a home run for investors who bought 10 years ago, but with total subscriptions to online video services reaching 1.1 billion in 2020 for an increase of 26%, Netflix can keep growing for a long time. 

It continues to demonstrate the ability to grow subscriptions with hit new releases. Squid Game is a new Korean-based series that launched in September and has already become Netflix's most successful show ever, with 142 million households watching in the first month. Most importantly, the show helped Netflix add 4.4 million net new subscribers in the quarter.

Netflix is positioned to have a blockbuster 2022, with a more normalized content-release slate, including the highly anticipated season four of Stranger Things, scheduled for release next summer. With management expecting the business to become free cash flow positive starting next year, this is a great time to consider starting an investment in this top streaming stock.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. John Ballard owns shares of Amazon, Microsoft, and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Microsoft, and Netflix. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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