“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” — Warren Buffett
The easiest way to build wealth for your family is to invest in companies that will be growing throughout your lifetime. One reason Buffett likes a forever holding period is due to the power of compound interest.
If you add $500 every month to a group of stocks that compound in value at 10% per year on average, you’ll have $8.66 million in 50 years. The amount multiplies the more you save every month, or the higher rate of return you earn on your investments.
So, how do you find stocks that can grow for decades? The future is always uncertain, but investors can increase their chances of success by looking for companies that have already proven time and again the ability to adapt to change. It’s easy to identify companies that are growing, but you want to invest in companies that can survive the inevitable forces of competition. Two growth stocks that have withstood that test are Netflix (NASDAQ:NFLX) and Microsoft (NASDAQ:MSFT).
The streaming giant is still growing at a fast pace
Netflix has spent most of the last decade investing billions in original content. Those investments certainly paid off last quarter. Growth in paid memberships accelerated over the fourth quarter, as 15.77 million people signed up amid the COVID-19 pandemic. While this momentum may not last once people return to their normal social life, the first quarter highlighted the tremendous value Netflix offers for an affordable monthly fee. The breadth of content on the service has made Netflix a default entertainment option for its growing 182 million subscribers worldwide.
More than 20 years since Netflix started, it is still growing annual revenue over 20% every year. As impressive as that is, it’s even more impressive how Netflix got to this point.
Netflix has had to change and adapt to get to where it is today. The business was founded in 1997 as a DVD-rental-by-mail service, which meant it had to gain market share against entrenched rivals like Blockbuster and countless local video stores around the country just to get to first base.
The concept of a DVD-rental-by-mail business was a high-risk endeavor. Netflix had to convince people that it was better to wait a few days to get your rental via snail mail instead of visiting your local store up the street. As Netflix reduced shipping time and expanded its selection, it eventually knocked out an entire market of rental stores.
But just as Netflix was conquering the DVD rental business more than 10 years ago, co-founder and CEO Reed Hastings was ahead of the game in recognizing the need to go digital. Netflix launched its first original series in 2013. Since then, the stock is up 750%.
The future of TV is streaming, and Netflix is way ahead of the pack thanks to visionary leadership. Netflix’s expanding library of streaming content and ability to raise prices should deliver returns for investors for a long time.
Essential software and cloud services for the new economy
For more than 30 years, Microsoft has provided essential software for businesses and consumers to remain productive. But now organizations and people working at home are relying on Microsoft’s services more than ever.
Microsoft saw sharp increases in engagement during the quarter ending in March, with high usage of Microsoft Teams, Microsoft 365, and its Xbox gaming business. In explaining the quarter, CEO Satya Nadella summed up why Microsoft remains a good growth stock to add to your holdings:
We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security — we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything.
The cloud transformation of Microsoft has delivered tremendous gains for shareholders, with the stock nearly quadrupling over the last five years.Revenue continued its strong trajectory amid the COVID-19 crisis, up 15% year over year, while earnings climbed 23%.
This pandemic is accelerating the trend toward digital everything. Microsoft has the expertise in productivity software and cloud computing to pave the way for how business is done in the 21st century.
It’s certainly got the cash to continue innovating and paying a dividend to shareholders. Microsoft ended the recent quarter with nearly $75 billion in net cash on its balance sheet, and trailing-12-month free cash flow of $43 billion.