The technology sector evolves rapidly, and companies that are unable to innovate -- or have no economic moat -- often end up being left behind. So, to find tech companies that can provide solid returns over the long run, investors have to look for companies that can innovate or have a competitive advantage.
That sounds simple enough, but corporations that display one or both characteristics can sometimes be hard to find. However, they do exist, and here are two examples: Meta Platforms (META 0.43%) and Airbnb (ABNB 0.75%). Both of these tech leaders are worth investing in for the long haul. Let me explain.
1. Meta Platforms
Meta Platforms was a social media pioneer with Facebook, but the company's portfolio of websites and apps now includes Messenger, WhatsApp, and Instagram. The tech giant benefits from a solid competitive edge from multiple sources.
First, Facebook has high switching costs for users. Those who want to connect with family and friends would be hard-pressed to find a platform with as many people on it. Facebook ended the second quarter with some 3 billion monthly active users, a 3% year-over-year increase.
Second, Meta Platforms benefits from the network effect, with the value of its ecosystem increasing with use, especially for advertisers. The more people are plugged into its universe, the more attractive it becomes for businesses to advertise in this virtual world Meta Platforms created.
It's true that a decrease in ad spending has affected Meta Platforms' top-line growth, but the company is slowly rebounding. In the second quarter, the company's revenue of almost $32 billion rose by 11% year over year, while its net income increased by 16% year over year to $7.8 billion. These results are vastly better than what the company reported as recently as the first quarter.
Meta Platforms should continue to bounce back as ad spending does. The company also instituted cost-cutting initiatives that seem to be paying off. Elsewhere, Meta Platforms is still ramping up other growth avenues. The company's Reels (short-form videos) initiative is being monetized rapidly and now boasts a run rate of $10 billion, up from $3 billion in the fall.
That's a fantastic increase in less than a year. Paid messaging on WhatsApp is also making steady progress, according to the company, especially within WhatsApp for business, which has 200 million users.
Meta Platforms is making use of artificial intelligence to boost revenue, too. The most important reason to buy the company's stock is that its massive ecosystem grants it plenty of opportunities to create and exploit various monetization opportunities.
They won't all pay off, but some will. And thanks to the company's moat, competitors will find it difficult to snatch most of its users away. It's hard to imagine that happening in the foreseeable future. Investors can safely park Meta Platforms stock in their portfolios for good.
2. Airbnb
Airbnb's platform helps people find vacation rentals. The company has an impressive library of homes, apartments, private rooms, condos, and more worldwide that cater to people's preferences, wallets, etc.
One advantage Airbnnb has over hotels is the "homey" feel it can provide, with private kitchens, appliances, and many other features designed to make travelers feel at home.
However, the hosts on the other side of these transactions also benefit since renting a spare room on Airbnb can be a quick way to make some extra cash. The company benefits from the network effect, with more hosts attracting more guests and vice versa.
Despite falling out of favor during the early days of the pandemic, Airbnb has bounced back.
In the second quarter, the company's revenue of $2.5 billion was up 18% year over year. Airbnb's net income of $650 million soared 71.5% compared to the year-ago period. The company's net profit margin of 26% reached an all-time high, while free cash flow of $900 million jumped by 13% compared to the year-ago period.
Airbnb's margin tends to be excellent since it does not own and run rental properties itself, so the company does not deal with the high costs associated with all that hassle.
Instead, it is content collecting fees from guests and hosts on its platform. Airbnb arguably benefited from pandemic fatigue last year. Travelers finally had the opportunity to go where they wanted after being forced to stay inside in 2020 and much of 2021, so they took advantage. This dynamic has somewhat died down, and the company's revenue growth has slowed compared to 2022.
ABNB Revenue (Quarterly YoY Growth) data by YCharts
Even so, Airbnb's revenue and net income remain above their pre-pandemic levels, and the expanding margins are a good sign, too.
What's next for the company? Airbnb should continue disrupting the hospitality industry for a long time. And thanks to its competitive edge and excellent margins, the tech giant is poised to deliver outsize returns to patient investors. In short, Airbnb is an outstanding buy-and-hold stock.
