How Tech Stocks Can Create Long-Term Wealth
Picture this: It's 1980 and you're trying to build wealth as quickly as possible. You're in the market for a tech stock with potential for long-term growth. You have quite a few options -- the industry has a variety of young, dynamic companies prepared to take advantage of a burgeoning consumer market.
One of the most intriguing firms is a small company that just a few years ago was operating out of a garage. The company has strong leadership and exciting products. Even better, it's preparing to go public at $28 per share.
You decide to jump in and buy a large stake. The stock has its ups and downs, but you're determined to hold onto it. Twenty five years later, the stock really starts to climb. Yet somehow you manage to resist the temptation to cash in.
By 2012, the shares you bought for $28 are now selling for more than $700. You decide it's time to cash out.
Your return on your Apple shares? A bit more than 2,300 percent.
Intriguing story, right? Anyone with the foresight to do something like the above scenario likely ended up very wealthy. Of course, you could have just as easily invested in Commodore International, the company responsible for the Commodore 64 and Amiga computers. Commodore was one of the world's largest microcomputer companies in 1980. It was determined to bring computers "to the masses, not the classes." Commodore sold millions of computers and seemed poised for even bigger things.
Unfortunately, questionable business practices and ill-fated decisions doomed the company to irrelevancy. Bankruptcy soon followed, and Commodore was consigned to the dustbin of tech history.
The Apple of our eye
It's obviously too late to buy Apple at $28 per share. The stock split shortly after reaching $700 and is now trading at $132. That's a positive thing for many people. At $132, Apple shares become more affordable for budget investors.
While Apple has been criticized for not releasing a category-changing product like the iPod or iPhone in years, that doesn't mean the company isn't a great bet. Despite years of unrestrained growth, the stock is still an excellent value.
Apple has unrivaled customer loyalty. The company also has the kind of cachet of which most other firms can only dream. Though many observers were concerned about Apple's leadership in the post-Steve Jobs era, that concern has proved unfounded. CEO Tim Cook has provided steady leadership, overseeing a period where Apple has refined its product line rather than reinvent its offerings.
Most importantly for investors, Apple is swimming in cash. The company has nearly $180 billion in reserve. That's enough to pay every American a dividend of more than $500.
It's also enough cash to give Cook enormous flexibility. He could buy Disney (market cap roughly $160 billion) or Amazon ($140 billion). Or he could continue to build that nest egg for something even more transformative.
Other smart tech possibilities
While Apple's a strong play, it's far from the only option. Morgan Stanley recently issued a report listing 30 stocks that are well-positioned for growth over the next three years. The firms selected by Morgan Stanley rank highly in competitive advantages, pricing power, growth and cost efficiency.
In the tech sector, Morgan Stanley recommended the following stocks:
- Avago Technologies.
- Amphenol Corporation.
- Palo Alto Networks.
- Workday Inc.
In this newsletter, we've previously encouraged readers to take a close look at Palo Alto Networks and Google. Nothing has changed to alter that assessment. Palo Alto is well-positioned to benefit from cybersecurity growth. We've experienced a spate of high-profile corporate hacks in the last 12 months. Given the precarious state of corporate cybersecurity, that's not likely to end anytime soon. Morgan Stanley predicts 21-percent growth through 2020 for Palo Alto, calling the platform "disruptive" and built to address an evolving security landscape.
Morgan Stanley calls Google's position as a leader in the tech space "unmatched." They believe growth opportunities outside Google's core search business will drive significant growth in the coming years. Morgan Stanley also believes Google stock is well priced, though the company's search business has slowed faster than expected.
Of the remaining companies, Avago is perhaps the most intriguing. The company is one of the fastest growing in the tech sector. Revenue is up more than 100-percent in the last 12 months. The company's stock price is up more than 80-percent over the same period.
If you're looking for a great long-term bet in the tech sector, firms such as Apple and Google are strong plays. Yet smaller firms such as Avago and Palo Alto offer the potential for explosive growth. By making a smart investment now, you can build substantial wealth for tomorrow.