Warren Buffett once famously said his favorite holding period for a stock was "forever" since the right companies can generate massive gains for long-term investors. But it's also often said that everyone is a long-term investor until a bear market happens.
That's what happened in 2022 when rising interest rates sparked a stampede from growth stocks toward more conservative investments. However, blindly joining that herd can cause you to miss out on some big gains in the future, especially if you can afford to hold onto your stocks for decades instead of just a few quarters.
For example, a modest $3,000 investment in ASML (ASML -1.03%), Palo Alto Networks (PANW 0.11%), and Alphabet (GOOG 0.74%) (GOOGL 0.55%) would have blossomed into about $30,000, $32,000, and $16,000, respectively, over the past decade. Even if you missed out on those gains, I believe those three blue chip tech stocks could continue to deliver market-beating returns over the long term for patient investors.
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1. ASML
Dutch semiconductor equipment maker ASML is the world's largest producer of photolithography systems, which are used to etch circuit patterns onto silicon wafers. It's also the only manufacturer of top-tier extreme ultraviolet (EUV) systems used to produce the world's smallest and densest chips. These massive machines cost about $200 million each and require multiple planes to ship.
The world's most advanced chip foundries -- TSMC, Samsung, and Intel -- all require a steady supply of ASML's EUV systems to manufacture their most powerful chips. That makes ASML a linchpin of the global semiconductor sector and one of the best long-term plays on its secular growth.
Between 2017 and 2022, ASML's revenue grew at a compound annual growth rate (CAGR) of 19% as its gross margin expanded from 45% to 50.5%. Between 2022 and 2030, it expects its revenue to grow at a midpoint CAGR of 12% as its annual gross margin expands to 56%-60% by the final year.
It can maintain that rosy outlook because it doesn't face meaningful competitors in the high-end lithography market. ASML's stock isn't cheap at 32 times forward earnings, but it's still the best way to invest in the long-term growth of the semiconductor sector without betting on a single chipmaker.
2. Palo Alto Networks
Palo Alto Networks is one of the world's largest cybersecurity companies. Its ecosystem is split into three main platforms: Strata, which handles its older on-site firewall appliances; Prisma, which houses its cloud-based services; and Cortex, which provides threat-detection services powered by artificial intelligence (AI). It serves more than 80,000 enterprise customers, including nearly all the Fortune 100 and the "majority" of the Global 2000.
Palo Alto's scale and diversification make it an attractive long-term play on the global cybersecurity market, which Fortune Business Insights expects to grow at a steady CAGR of 13% between 2022 to 2029. As a market leader, Palo Alto has been growing faster than many of its legacy peers and the broader market. Its annual revenue already rose at a CAGR of 26% between fiscal 2017 and 2022 (which ended last July), and it expects its revenue to rise 22%-23% in fiscal 2023. Most of that growth has been driven by Cortex and Prisma, which it collectively calls its "next-gen security" (NGS) services.
Unlike many of its industry peers, Palo Alto has also stayed consistently profitable on a generally accepted accounting principles (GAAP) basis over the past year. It might seem a bit pricey at 54 times forward earnings, but it's arguably one of the safest and most balanced plays in the cybersecurity sector.
3. Alphabet
Alphabet, the parent company of Google, is currently the cheapest FAANG stock -- comprising Facebook's parent company Meta Platforms, Apple, Amazon, Netflix, and Alphabet's Google -- with a forward price-to-earnings ratio of less than 20. Its valuation has been depressed by recent macro headwinds -- throttling the growth of its advertising and cloud businesses -- and the rise of ChatGPT and other "generative AI" services that could potentially disrupt its core search engine in the future.
But for now, Google still dominates the online search market. YouTube is also the world's largest streaming video platform, Android is the top mobile operating system, Chrome is the most widely used web browser, and Gmail leads the web-based email market. It also recently launched its own generative AI chatbot, Bard, to keep pace with Microsoft's integration of ChatGPT into its own services.
Google's advertising and cloud businesses will remain under pressure until the macro environment improves, but analysts still expect Alphabet's revenue and earnings to rise 6% and 11%, respectively, this year as it streamlines its business through layoffs and other cost-cutting measures. Over the long term, I believe Alphabet will remain a dominant tech behemoth -- and that its stock will remain a great way for investors to gain simultaneous exposure to a wide range of advertising, cloud, and mobile technologies.
