Building generational wealth doesn't happen very often. Only 27% of people whose parents have college degrees have received an inheritance of any kind in 2019, according to the Federal Reserve's Survey of Consumer Finances. If your parents didn't go to college, your odds are slightly worse. And the median inheritance received from college-degree parents was only $92,700. That amount is nothing to sneeze at, but there's taxes to think about. Moreover, this is the median inheritance. By definition, half of the people who did receive an inheritance received less than this.
The point is, the vast majority of us haven't and probably won't be receiving generational wealth from our parents. And this reality from the past can't be changed. But we can do something about the future by building wealth to pass on to the next generation by saving and investing our own incomes now.
Of course, if you're looking for stocks you can buy, hold, and pass on to your heirs, then you need to find companies that are unstoppable. For me, Unity Software (U -3.48%), Axon Enterprise (AXON -2.41%), and Lam Research (LRCX -1.14%) are three companies that might fit this description. These aren't necessarily three stocks with the highest upside. Indeed, they might struggle to beat the market average some years. But I do expect them to have greater longevity than many other stock options, so they're perfect for building generational wealth.
Image source: Getty Images.
Unity: The preferred platform to build the future
Unity offers easy-to-use software for creating three-dimensional (3D) content and developing ways for users to interact with these 3D images. Think broadly. This software has applications in gaming, animation, augmented reality, the metaverse, and more. And according to the company, over half of all 3D content built today is built using Unity.
There's good reason to believe that Unity can keep its leadership position in the 3D space. Consider that the company doesn't charge people for its software if they're students or if their companies generate less than $100,000 in annual revenue. In other words, anyone new to the 3D game is very likely to choose Unity because it's the industry standard and -- more persuasively -- it's free. And once they create a viable business with over $100,000 in revenue, Unity can then start to profit as well.
This kind of value proposition for new creators is going to make Unity hard to stop. Furthermore, consider something interesting with the company's business model: You can create mobile games, for example, with Unity. And creating things is recorded in the company's Create Solutions segment, a subscription-revenue product. But once games are created, you can also use Unity to operate them and get them monetized, etc. This revenue is recorded in its Operate Solutions segment, and it's not a straight subscription but rather a usage-based revenue model, meaning Unity makes more money as their customers succeed.
Unity is likely to attract a lot of creators because of its value proposition. These can then stick with Unity to operate their digital content. And assuming Unity does a good job here, its revenue has uncapped upside because it's a usage-based revenue model. In the third quarter of 2021, Unity had a net-dollar expansion rate of 142%, which clearly demonstrates its customers are spending more money over time and its business model is working.
According to Unity's management, only around 2% of the world's digital content is currently made in 3D. It's only reasonable to assume that this will increase substantially in coming years. I'll refrain from giving a set-in-stone forecast. But if 3D content had 5% to 10% share, it would still be a relatively small part of the overall market. And in this scenario, Unity could more than double its business just by maintaining its leadership position in the space.
Image source: Axon Enterprise.
Axon: Making work easy and switching hard
If Axon Enterprise only offered Tasers to police departments, then this would be a fragile business. But its decision to offer software solutions in conjunction with its hardware devices has made this an unstoppable business in my opinion. Here's why.
Axon's Tasers are infrequent purchases with little recurring-revenue potential. But they do enjoy widespread adoption. In the U.S., 21% of law enforcement, federal, and corrections agencies, along with enterprises, are already Taser users, according to the company.
Brilliantly, Axon leveraged its existing customer relationships into streams of recurring revenue when it decided to develop software solutions. Law enforcement officers can now automatically have evidence backed up to the cloud. And artificial-intelligence (AI) software can quickly fill out tedious paperwork. It's apparent its customers appreciate these software solutions because they're increasing spending, as measured by its 119% net-dollar retention rate in the third quarter of 2021. Moreover, Axon's hardware and software is increasingly a package deal. According to the company, 73% of total revenue in 2020 was tied to a subscription product.
Axon Cloud is the fastest growing part of Axon's business these days. In Q3, software-as-a-service (SaaS) revenue was up almost 42% year over year compared to total revenue growth of just 39%. And management estimates its cloud-solutions product is still only 2% penetrated in the U.S. compared to the aforementioned 21% market penetration for Taser. This means Axon has a robust growth opportunity ahead just within its existing customer base, to say nothing of new customers.
Once data is stored on the cloud, it's extremely inconvenient for customers to switch. This is the main reason I believe Axon is unstoppable. But the company also seems poised for more growth considering there's few companies -- if any -- that offer the broad suite of products that Axon does. The possibility of strong future growth was confirmed in Q3 with bookings. These represent spending commitments that can't be counted as revenue yet but are very likely to come in during future quarters. In Q3, Axon had bookings of $488 million, which was a quarterly record.
Image source: Getty Images.
Lam Research: Good luck trying to disrupt this one
Have you ever noticed how many carbonated beverage companies there are? One reason why there are so many is because it's relatively easy to create, package, and sell a drink. There's a low "barrier to entry." However, when it comes to creating equipment to manufacture semiconductor products, the barrier to entry couldn't be higher, which is why Lam Research is unstoppable. It faces little risk of being disrupted by a newcomer anytime soon.
Lam Research is a diversified business. That said, 64% of revenue comes from systems used for making memory products. Therefore, it's important to watch that segment of the industry. And in the near term, things are looking bright. Consider the outlook from memory company Micron Technology, which is a major industry player. Management from Micron just said it expects demand in 2022 to increase over 30% for NAND memory (flash memory) and over 20% for DRAM memory (dynamic random access memory) products. This suggests that Lam Research's services will be in hot demand in the coming year.
Beyond 2022, things also look bright for Lam Research. Various third-party market research reports confirm the general upward trend of the semiconductor industry. One example comes from Precedence Research, which predicts the entire industry will grow at an almost 7% compound annual growth rate (CAGR) through 2030, surpassing $800 billion by then.
Much of what makes Lam Research unstoppable also applies to other semiconductor stocks like Applied Materials and ASML Holding. However, I've highlighted Lam Research for this article because its valuation is the most attractive to me. It currently trades at a price-to-earnings (P/E) valuation of 23, which is within its historical range and a hair cheaper than that of top rival Applied Materials. And of these three stocks, it also pays the highest yielding dividend at 0.8%.
Of course, 0.8% from Lam Research isn't a high-yielding dividend by any means. But it's going up fast, having more than tripled over the past five years. And there's still plenty of room to grow.
One way to assess a company's ability to raise its dividend is by looking at its payout ratio -- the amount of earnings being used for dividends. Lam Research has a payout ratio of around 17%, whereas anything under 50% is typically considered to be conservative. In other words, Lam Research can more than double its dividend right now without stretching itself financially. Moreover, given what we've seen, it should be able to grow its earnings over the next decade, providing even more breathing room for future dividend increases.
In closing, Axon Enterprise may have the highest upside of these three stocks. It currently has a market capitalization of just $11 billion despite a very big market opportunity. But Lam Research might be the safest of these three, given how indispensable semiconductors are for modern life and how high the barriers to entry are in the industry. Therefore, if you're frightened by current market uncertainty, you might consider Lam Research, assuming you're committed to buying and holding for the long term.
