The recipe for a successful long-term investment is simple in theory but difficult in practice: buying shares of high-quality companies; pay reasonable prices for those actions; and hold on to them for many years, unless there are legitimate reasons to sell. Failure in any of these steps will cause problems.
Any stock could be duplicated in the next decade, but only some have an above-average chance to do so. These Motley Fool investors think Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) Blackberry (NYSE: BB) and Berkshire Hathaway (NYSE: BRK.B) are three of those values. This is what you need to know.
This technological giant is just beginning
Steve Symington (Alphabet ): It may seem crazy to predict that the shares of a $ 750 billion company could double from here. But I think Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) has the potential to do just that.
As the parent company of Google, Alphabet already has seven products that each have at least billion active users, including Search, YouTube, Gmail, Android, Chrome, Maps and the Google Play store . But it is easy to forget that around 4.5 billion people, two thirds of the world's population, still do not have access to the Internet. And the network effect that surrounds the already huge scale of Alphabet's commodity portfolio will mean that it is well positioned to benefit when those people connect.
Not to mention the smaller "Other Bets" segment of Alphabet, which is mainly made up of start-up companies with big long-term promises. Connected home products Think Nest, high-speed fiber Internet, Verily Life Sciences solutions and Waymo vehicles, among others.
Revenues in Other Bets rose almost 50% last year to $ 1,200 million. But many of its smaller companies are still in their pre-sale stages, so the segment incurred a strong operating loss of $ 3.4 billion in the same period. But with a growing cash treasury of nearly $ 103 billion on its balance sheet at the end of last year thanks to its hugely profitable Google operations, Alphabet can afford to continue to encourage these bets with a long-term mindset. If any of them really starts to take off in the next few years, it could fuel Alphabet's profits much more.
A Humble Technology Giant
Leo Sun (BlackBerry): BlackBerry controlled approximately one fifth of the global smartphone market in 2009. But eventually it lost the entire market to iPhone and Android devices. By the time John Chen became the CEO of BlackBerry in 2013, he controlled less than 1% of the market
. Instead of trying to return smartphones, Chen expanded the business software, services and BlackBerry licenses. Its main growth engine became the BlackBerry Enterprise Service (BES), which allows companies to protect and monitor their employees' mobile devices.
In 2016, BlackBerry stopped manufacturing its own smartphones and authorized its brand to the Chinese smartphone manufacturer TCL that created a new subsidiary called BlackBerry Mobile. TCL pays BlackBerry license fees, a source of high margin revenue that complements its software and services revenues.
Last year, BlackBerry software and services revenue (which includes its licensing fees) increased 20% and accounted for 80% of its top line. Unfortunately, that growth was offset by lower device sales and service access fees, and BlackBerry's total revenue fell 29%. But as revenue from access to services and devices falls to zero, the growth of its software and services should gradually compensate for those losses.
Wall Street expects BlackBerry revenues to fall by only 8% this year and rebound by 10% next year. It is also expected that their earnings will grow again as their income increases. BlackBerry's growth and valuations now seem messy, but I think investors could come back to this giant of humble technology in the next decade, and their actions could double.
Many years of growth ahead
Tim Green (Berkshire Hathaway): Warren Buffett's Berkshire Hathaway is worth almost half a billion dollars. But it is not crazy to think that actions could double in the next 10 years. Doubling over a decade requires a compound annual growth rate of just 7.2%. That's a little more than a third of the historical growth rate of both the book value of Berkshire and the price of its shares.
In other words, Berkshire does not need to resort to home runs for the action to double from here. You just need to keep doing what you have been doing. Under Buffett's leadership, the conglomerate has created a collection of high-quality companies with lasting competitive advantages that should shed increasing amounts of cash as time goes by. That cash can be invested in even higher-quality businesses, chosen by Buffett or his eventual successors.
Of course, if the general market does not go anywhere in the next decade, perhaps because the current valuations are historically high, Berkshire could follow suit and not double. But Berkshire's profits are likely to increase substantially during that time, making the stock more attractive and sowing the seeds of future profits.
Suzanne Frey, executive of Alphabet, is a member of the board of directors of The Motley Fool. Leo Sun has no position in any of the actions mentioned. Steve Symington has no position in any of the actions mentioned. Timothy Green owns Berkshire Hathaway shares (shares B). The Motley Fool owns shares and recommends Alphabet (A shares), Alphabet (C shares) and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.