1). Good companies have high returns on capital; this indicates that they are able to fend off competition and have enough capital to plow back into R&D.
1). Apple (38.41%), Microsoft (16.61%) and Google (16.61%) demonstrate this while “competitors” like Hewlett-Packard Company (NYSE:HPQ) and Research In Motion Ltd (NASDAQ:BBRY) Blackberry have negative returns.
2). These three companies (Apple, Google and Microsoft) dominate multiple industries.
2). These aren’t “one sector” tech companies. To say they are is like saying McDonald’s Corporation (NYSE:MCD) and Ruth’s Hospitality Group, Inc. (NASDAQ:RUTH) are both “restaurants;” technically true, but there’s so many layers under that “restaurant” umbrella.
1). In other sectors it’s impossible for one small group of companies to dominate multiple sub-sectors, it only happens in “tech”.
2). And they really do dominate those sub-sectors.
3). Even Microsoft, still holds nearly 50% market share in Windows. The company is surrounded by enough negativity to make you think it’s on the brink of bankruptcy. Does this make any sense for a company that’s returned over 7% (EPS and revenue) growth annually, over the past five years?
3). Microsoft is the only real threat of any size and influence to Apple and Google, in any of these growing sub-sectors (hardware, OS, search, software and even cloud).
1). So why does a company like Baidu.com, Inc. (ADR) (NASDAQ:BIDU) trade at higher valuation than Microsoft, when the only market Baidu is in is search and it doesn’t dominate it globally? Microsoft’s “Bing” is a complete afterthought—I get that—but it still holds a larger global market share than Baidu’s (3.5%). In fact, Bing only comes in second to only Google, albeit a very distant second.
Don’t make this a riddle.
Simply put: to make money in tech we need to accept what we don’t know and take comfort in what we do.
Apple may cannibalize itself, Microsoft may grow slowly, Google may over expand; there’s no way to tell if any of these “micro” events will or won’t happen—stop obsessing!
What we do know is that these three firms have no strong competitors in multiple, growing sectors that they collectively dominate.
So why not just buy all three?
Sure, doing so will be admitting that you can’t guess “precisely right” but you should still likely beat the market handily.
Better yet, you’ll actually sleep well at night; and isn’t that the point?
The article It’s Time to Solve This “Great Investment Riddle” originally appeared on Fool.com and is written by Adem Tahiri.
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