These world-class businesses have massive advantages and show no signs of slowing down.
The key to successful investing is to buy the right stocks at the right price and hold them for the long term, allowing the businesses to grow and the stock price to rise. This is an obvious statement, but it is easier said than done. Because we can’t know the future, buying the right stocks is always going to be left somewhat to chance. That said, there are characteristics to look out for before clicking the buy button.
Businesses with durable business models and competitive advantages are a good place to start when considering what stocks to buy. Here are some stocks that fit this mold and are great choices for investors looking to put capital to work in the market.
ASML
Netherlands-based manufacturer ASML (ASML -2.25%) makes lithography machines, which are necessary for the production of semiconductors. Almost everything in our technology-driven world uses semiconductors, and those chips are all made using ASML’s machines. In fact, ASML is the only company in the world that makes the high-end lithography machines necessary for the most cutting-edge chips. This natural monopoly should appeal to investors, especially since it’s an industry with undeniable tailwinds.
ASML reported its first-quarter 2024 earnings recently, and while the headline numbers may have appeared disappointing, there’s more than meets the eye. Revenue for the quarter fell 21% compared to Q1 of 2023. This continued a streak of slowing revenue growth going back more than a year. This was expected. Despite all the headlines about artificial intelligence (AI) demand, the overall semiconductor industry is in a cyclical downturn. This happens, and it will reverse in time.
What investors should pay attention to is the company’s backlog, which was 38 billion euros at the end of the quarter. This is important to note. As the industry struggles through its downturn, ASML is chugging along, making as many ASML machines as it can, and still not meeting demand. This allows the company to continue to spend on research and development to continually stay at the forefront of this ever-evolving field.
ASML expects this year to look similar to 2023 in terms of financial results, but then expects a return to growth in 2025. This stock currently trades for 47 times earnings, which is not cheap, but could end up looking inexpensive in retrospect when the industry begins its cyclical recovery.
Alphabet
While tech giant Alphabet (GOOG 0.56%) (GOOGL 0.66%) has been in the headlines for its AI efforts, there’s another aspect of AI that has some investors concerned. Alphabet is the clear leader in search. Using Google to search for something on the internet is so ubiquitous that many people refer to any internet search as a “Google search.” However, with the proliferation of chat-based AI products, there was concern that traditional search would be upended by products like ChatGPT and other large language models (LLM). Alphabet even has its own LLM called Gemini.
Based on Alphabet’s Q1 results, it doesn’t appear the threat from other LLMs has manifested itself yet. Alphabet’s search and other revenue grew 14% year over year, reaching $46 billion. Growth was solid across the board, with YouTube ads increasing by 21%, Google advertising growing by 13%, and Google Cloud improving by 28%.
Perhaps the biggest news to come from the Q1 earnings was the initiation of a dividend, which will start at $0.20 per share. This is good news for shareholders, but it’s not the only way they’re being rewarded. Alphabet has been aggressive with share buybacks over the last several years and has reduced its shares outstanding by more than 10% over the last five years.
Alphabet is as dominant as it’s ever been and is well positioned to benefit from the interest in AI both in its own products and also through increased cloud revenue. With a robust capital return policy in place, investors are poised to benefit for years to come.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeff Santoro has positions in ASML. The Motley Fool has positions in and recommends ASML and Alphabet. The Motley Fool has a disclosure policy.
