The stock market is full of thousands of companies, some of which compete against each other. However, each investor only has so many resources, so they should spend most of their time focused on the industry leaders. That’s not to say those second- or third-place companies can’t be good investments. But, with only so much time as an individual investor, focusing on the leaders is a smart strategy.
I’m excited about two industry-leading stocks: Amazon (AMZN 3.04%) and ASML (ASML -2.41%). Both companies are dominant in their space and have strong potential for further expansion. Read on to find out why.
Amazon
In the e-commerce world, it’s basically undisputed that Amazon is the leader, although competition has stiffened recently thanks to the pandemic. While its e-commerce is a great business, I’m more excited about Amazon Web Services (AWS), its cloud computing division.
Amazon leads Microsoft Azure and Alphabet‘s Google Cloud by a significant margin.
| Cloud Computing Company |
Q3 2022 Market Share |
|---|---|
| AWS | 34% |
| Azure | 21% |
| Google Cloud | 11% |
Data source: Synergy Research Group
For the 12 months ending in September 2022, trailing 12-month revenues totaled an estimated $217 billion across all cloud computing providers. However, Precedence Research predicts the cloud computing market will hit $1.6 trillion by 2030. If Amazon can keep its market share, it could generate $544 billion in AWS revenue by 2030 — a 611% increase from its current levels.
That’s likely a best-case scenario, but it shows this segment’s incredible upside.
As for the overall business, Amazon has some work to do. It burned nearly $20 billion in cash over the past year, but it’s compensating for its overspending by laying off workers and focusing on profitable segments.
With the stock trading for less than 2 times sales, its lowest point since 2015, few stocks have the upside and size of Amazon. I think it’s one of the top values in the market right now, and investors should be looking to establish a position as soon as possible.
ASML
Okay, I lied. ASML isn’t just the industry leader for extreme ultraviolet (EUV) lithography; it’s the only one with the technology in production. EUV machines give semiconductor foundries the ability to produce 3 nm, 5 nm, and 7 nm chips — the most powerful varieties used in many electronic devices. With ASML’s technological monopoly in this space, it has cornered a vital market.
However, ASML has some competition on the horizon. Huawei, the Chinese tech giant, recently filed a patent for its own EUV technology. While this is a critical first step in creating one of these machines, it’s far from a death blow to ASML.
First, a patent does not mean full production. Researching and proving the technology is one thing — producing a machine the size of a school bus is another.
Second, these machines won’t compete directly against ASML. Because ASML’s EUV machines are banned from being sold to China, the Chinese government will likely restrict Huawei’s technology to domestic use. So ASML may be pressured because its chip foundry customers will see new competition in Chinese-manufactured 3 nm, 5 nm, and 7 nm chips.
Most of this competition is likely years (if not a decade) away. By then, ASML will likely have created some new technology — especially if Moore’s law holds true.
The company recently reported its fourth-quarter earnings, and management gave investors a lot to love. In Q4, revenue increased by 29% over last year, and earnings per share (EPS) increased by 5%. However, its 2023 forecast gave investors something to talk about.
In 2023, ASML expects sales to grow 25% over 2022. Additionally, it expects its gross margin to tick up marginally, showing the company has some pricing power with customers or that supply chain issues have been ironed out and components aren’t costing as much. Regardless, ASML delivered another excellent quarter for investors.
Because ASML is a technological monopoly, it demands a premium price tag. At 48 times earnings, it certainly crosses the expensive threshold. This is an investment risk, but with ASML’s outstanding track record, it’s a price I’m willing to pay.
ASML and Amazon are both industry leaders and make for great future investments. I think 2023 will be an excellent year for both of them, and investors should consider picking up some shares.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keithen Drury has positions in Alphabet and Amazon.com. The Motley Fool has positions in and recommends ASML, Alphabet, Amazon.com, and Microsoft. The Motley Fool has a disclosure policy.