Investing can be as straightforward or as complicated as you want it to be. There are businesses to own that are difficult to understand without specialized expertise and others that are very easy to grasp. Which type to buy is a decision investors must make for themselves.
There are two stocks I own whose businesses are very easy to understand. These simple stocks are long-term winners with bright futures ahead -- and as a consumer, you likely know them well, too.
Apple
At the most basic level, most consumers know Apple (AAPL 1.67%) because of its hardware devices. Whether it's Mac computers, iPhones, or the newly announced Vision Pro mixed reality headset, Apple has become one of the best-known brands in the world.
Investors in Apple stock were probably drawn to the company because of these popular, easy-to-use devices. After all, the company sold $40 billion of iPhones alone in the third quarter of fiscal 2023 (ended July1). This makes Apple very simple to understand. It makes and sells successful electronic devices that millions of consumers can't live without.
However, what investors might pay more attention to is how the company is slowly monetizing its users on the software and subscription side of the business. At the end of the third quarter, Apple had an installed base of over 2 billion users. And those users not only buy hardware, but more and more of them are subscribing to services like Apple Music, iCloud storage, and AppleCare.
This services segment of the business has grown to account for 26% of total revenue. In Q3, services revenue increased 8% to $21 billion, setting a new all-time record. This services revenue is also higher-margin and Apple is starting to see this impact the overall business. In Q3, gross margin increased by 20 basis points to 44.5%.
Apple is already an extremely profitable and cash-generative business. The company had a net income margin of 24% and generated $26 billion in operating cash in Q3. The increasing prominence of its services business should only improve these results moving forward.
Amazon
If you dig into Amazon's (AMZN 1.34%) results, there are many moving parts and it could appear complicated to the average investor. However, at the surface level, the business is fairly simple. Additionally, because it's consumer-facing, most of us are familiar with the main parts of the business. Amazon got its start by selling books online and has grown to become the go-to e-commerce destination for millions of shoppers.
Investors may also be familiar with Amazon Web Services (AWS), which initially started in order to help Amazon meet its cloud infrastructure needs but has become the leader in cloud services for many other businesses.
In the recently reported second quarter of 2022, the e-commerce and AWS segments of the business both showed improvement. Total revenue increased by 11%, with all three segments contributing to this growth. Perhaps more importantly, the North America and international segments, which represent mostly the e-commerce business, turned operating losses into operating profits compared to the prior-year quarter.
However, much like with Apple, there is a lesser-known part of the business that's growing impressively and is slowly becoming an important part of the overall results. Advertising services revenue grew by 22% in Q2 to $11 billion. This part of the business now accounts for 8% of total revenue, up from 7% in Q2 2022.
The advertising services segment is now the fourth-largest source of revenue for Amazon, trailing only AWS, online stores, and third-party sellers. Investors should keep an eye on this segment moving forward to see if it can become an even more material driver of business results over time. Considering how successful other large tech companies have been with advertising, there's reason to believe this could become a material driver of revenue and profits for Amazon.
