Starting your journey as an investor can seem like an overwhelming task at times, but great investments are often hidden in plain sight. On occasion, a company may have a product with such enormous brand power that the product's name itself becomes the generally accepted word when dealing with anything similar to it. For example, consider that Ziploc, Zipper, Wite-Out, Velcro, Kleenex, and even Kiwi originally started as brands, but are now used almost generically.
By dominating their original markets so thoroughly, these products entered our everyday vernacular, highlighting the immense brand power that they brought to their parent companies. Today we will look at two 21st-century examples of this phenomenon and see why they would make great foundational pieces for any new investor's portfolio.
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Alphabet
While the Google name, at least as a publicly traded stock, has been changed to Alphabet (GOOGL 9.45%) (GOOG 9.23%), the word "Google" itself is frequently used as a verb in today's world. Thanks to its 93% market share, Google is synonymous with any search for information on the internet -- whether it goes through the Google search engine or not.
Driven by the dominance of its search engine, Alphabet has more than doubled its revenue since 2017 and boasts a staggering 29% profit margin. Despite its already massive size, accounting for nearly $38 billion in revenue during the third quarter of 2021, Google search unit revenue grew by 44% year over year.
This increase was led by a strong retail advertising environment, which is important to Alphabet as it shows the continued adoption of omnichannel sales for retailers. For instance, as omnichannel continues to become more prevalent in today's economy, the company is uniquely positioned to benefit not only from its search operations, but its YouTube advertising.
To this point, Alphabet's YouTube ads business grew to $7.2 billion during Q3, up 43% year over year. Altogether, Alphabet's overall advertising business generated nearly $24 billion in operating income, a stunning figure that grew by 67% year over year.
On top of this advertising success, Alphabet's burgeoning Google cloud business is still in high growth mode. Recording nearly $5 billion in sales during Q3 2021, the cloud unit matched Alphabet's overall sales growth and has an incredibly bright future. As hybrid work environments continue to gain popularity, Google Workspace (Gmail, Drive, Docs, Sheets, etc.) is beautifully positioned to continue fueling strong growth in the cloud segment.
Trading at 37 times free cash flow (FCF), Alphabet may look expensive at first glance. However, compared to fellow tech behemoth Microsoft and its 50 times FCF ratio, Alphabet is cheaper. However, what makes this most intriguing is that Alphabet's quarterly sales growth rate of 41% year over year is nearly double Microsoft's 22% rate.
Thanks to this relatively discounted price for its high growth rates, Alphabet would make a great core holding for any new portfolio as it looks to continue building on its dominance in the search market.
Zoom
Much like Google is synonymous with internet searches, Zoom Video Communications (ZM 1.22%) is also quickly becoming a commonly used verb to describe video meetings of any kind. Operating under its mission to "make communication frictionless," Zoom is helmed by founder and CEO Eric Yuan.
With a 95% approval rating from his employees according to Glassdoor, Yuan ranked #63 on the website's top CEOs of 2021. In addition, Zoom as a company was rated at 4.5 stars out of five by Glassdoor, which, when paired with its CEO's high approval rating, is a strong sign of a very healthy company culture.
After initially seeing its stock price rise over 700% since its IPO in 2019, Zoom's price has been cut in half in just the last year. Most of this drop comes from decelerating growth rates which began facing pandemic-aided comparable quarters from a year ago.
However, despite this slowing growth, Zoom extended its streak of consecutive quarters with a dollar-based net expansion (DBNE) rate above 130% to 14. While DBNE does not factor in customer churn, it highlights the company's ability to upsell existing clients with new and/or additional products. Therefore, by consistently keeping its DBNE above 130%, Zoom has demonstrated its ability to execute the "expand" portion of its land-and-expand business model.
What makes this DBNE of particular interest to investors, however, is that during the third quarter, Zoom grew the number of customers who contribute more than $100,000 in annual sales by 94% year over year. Should the company continue successfully executing its land-and-expand operations, these new large customers could help reaccelerate sales growth.
Trading with a market capitalization, or company price tag, of $56 billion, Zoom trades for roughly 37 times FCF. While this figure is more than double the S&P 500's average of 15, Zoom's trailing 12 month sales have doubled compared to the prior year's total, making its valuation quite appealing.
All in all, despite still being in high-growth mode, Zoom's profit margin of 29%, paired with its strong culture and leadership, makes it a uniquely compelling stock for any new investor to start a portfolio with.
