It’s rarely a wise move to purchase shares of a company based on its performance over a short period, such as eight months. However, strong market runs often indicate that a company is a worthwhile investment.
Take Shopify(NASDAQ: SHOP) and Netflix(NASDAQ: NFLX), two stocks that have crushed broader equities this year. Shopify is up by 30%, while Netflix has climbed 37%. But that’s not what makes these companies attractive per se.
Both market leaders have underlying businesses that are performing well, boast excellent prospects, and have competitive advantages that make them great long-term investments.
Here’s more on Shopify and Netflix.
Image source: Getty Images.
Shopify operates in a highly competitive industry. Many e-commerce players offer services that rival what it does. Yet, Shopify has managed to establish itself as a leader.
Part of the reason behind its success is its simple, easy-to-use platform. Setting up an online storefront with the company is quick and does not require a degree in web design. Shopify also offers plenty of flexibility thanks to an app store that caters to the needs of its merchants.
The company has been riding the wave of the growing e-commerce industry for more than a decade, resulting in rapidly growing revenue, an improving bottom line, and soaring free cash flow.
Shopify is not yet consistently profitable, but it is closer than ever to that goal. Meanwhile, the platform continues to improve as Shopify has introduced a suite of artificial intelligence (AI) services to make the task of building and customizing stores on its platform even easier.
With all that going on, it’s not surprising that Shopify has performed as well as it has this year, but there is still plenty of upside to consider over the long run. The e-commerce industry is far from reaching its peak. The U.S., Shopify’s most important market, is significantly behind the world leaders in e-commerce penetration, even though it features in the top 10.
Furthermore, Shopify operates in more than 175 countries worldwide, with most of these countries also lagging behind the leaders in that category. And although competition will remain — and perhaps even intensify — Shopify’s brand power, switching costs, and network effects grant it a solid moat. The stock may or may not maintain its momentum for the rest of the year, but over the next decade, the e-commerce specialist could deliver more market-beating returns.
Netflix remains the leader in the streaming industry. Only one platform surpasses the company in TV viewing hours in the U.S., and that’s YouTube, which doesn’t offer the same experience as Netflix. YouTube is primarily powered by third-party content creators, although it also offers a subscription service that provides a cable-like model.
So, YouTube aside, Netflix remains the top player despite the significant increase in the number of streaming platforms since the end of the previous decade, some of which were launched by major media companies with large, established viewer bases.
That says a lot about Netflix. The company’s brand name remains intimately tied to streaming, which grants it a competitive advantage. Thanks to its vast ecosystem of subscribers, it leverages data on viewership habits to craft brilliant content that people love to binge-watch. These factors remain central to Netflix’s success, and over the past few years, the company has made some notable changes, such as introducing a lower-priced ad-supported tier.
The results are clear. Netflix’s financial results are excellent, with revenue, earnings, and cash flow growing fast. Yet, Netflix hasn’t become nearly as mainstream as some might think. Yes, cable is on the decline, but it isn’t dead yet. It isn’t even on life support. It is being kept alive, largely by older people who grew up with it and are more reluctant to embrace new technologies.
Netflix’s estimated $650 billion revenue opportunity highlights the potential the company still has, given its revenue of $39 billion last year. Netflix hasn’t peaked yet, even after its excellent performance this year. It’s still time to buy the stock.
Before you buy stock in Shopify, consider this:
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Prosper Junior Bakiny has positions in Shopify. The Motley Fool has positions in and recommends Netflix and Shopify. The Motley Fool has a disclosure policy.
