Key Points
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Technology stocks are risky to invest in, meaning investors should focus on competitive advantages before buying.
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Coupang is a strong e-commerce player in South Korea building immense scale.
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Taiwan Semiconductor Manufacturing is the leading provider of advanced semiconductors for AI with minimal competition.
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10 stocks we like better than Coupang ›
Everyone loves investing in the hottest new technology. The problem is, investing in cutting-edge technology can be risky, as there is constant disruption peeking around the corner that could kill your business model. Just ask investors in software companies today how they feel about the risk of artificial intelligence (AI)-generated programing and what it could mean for their competition.
If you are going to invest in technology, you need to focus on finding companies with competitive advantages, or competitive moats around their operations. This can come in the form of economies of scale, a classic competitive advantage that can lead to durable leadership for a company in a sector. Here are two millionaire-maker technology stocks with wide economies of scale that should help them grow for years to come.
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Coupang’s meteoric rise
Everything that Amazon has done in the United States, Coupang (NYSE: CPNG) is replicating in South Korea. At least, that is what it can seem like sometimes when following the company. Coupang is an e-commerce marketplace in South Korea with first- and third-party sales, its own delivery and warehouse network, and a burgeoning advertising and streaming video operation.
In fact, I would argue that Coupang has improved on the Amazon delivery model, if you thought that was even possible. Customers who subscribe to Coupang’s Rocket Wow membership get free delivery that can arrive by 7 a.m. the next morning if ordered before midnight. It has rapid fresh grocery delivery, as well as technicians that will install appliances and car parts ordered on the Coupang marketplace.
All of these services are possible because of Coupang’s immense investments in infrastructure in South Korea. Last quarter, Coupang’s revenue grew 21% year over year in constant currency, while gross profit grew even faster at a 31% year-over-year rate. The company is investing heavily to grow but still generated operating income of $154 million last quarter compared to $7.9 billion in revenue.
Coupang still has a long runway to gain market share in South Korea. But it is beginning to expand its services as a full-fledged technology provider. This includes expansion geographically into Taiwan, which is seeing rapid revenue growth as the company replicates its e-commerce model. It just announced for the first time its Intelligent Cloud computing service, which is taking a page out of the Amazon playbook. It is unclear how large Coupang’s cloud business is today, but with so much spending going to cloud companies when it comes to AI, there is a ton of potential here.
Today, Coupang trades at a market cap of $55 billion. With huge potential to expand its e-commerce and subscription platform across East Asia, there is room for the company to reach $100 billion or more in annual revenue in the near future compared to $31 billion over the last twelve months. With expanding profit margins, this makes Coupang a great stock to buy today and a millionaire maker for those looking to hold for the long haul.
Image source: Getty Images.
Manufacturing prowess for AI
The second stock on my list has even larger economies of scale than Coupang: Taiwan Semiconductor Manufacturing (NYSE: TSM). The semiconductor and computer chip manufacturer — otherwise just called TSMC — dominates advanced systems that are being utilized for AI. Its largest customers include the likes of Nvidia, Apple, and Qualcomm.
TSMC spends around $35 billion annually building factories to produce computer chips, including over $100 billion in committed investments in the United States. Along with its large contracts with suppliers and customers, this capital spending gives TSMC a huge competitive advantage in scale versus the competition. In fact, no other company can match its advanced semiconductor making at such a large scale, giving TSMC little competition to be afraid of.
As you might expect, TSMC’s revenue has begun to soar because of the insatiable demand for AI computer chips. Net revenue grew 35% year over year last quarter to $25.5 billion, with operating margins approaching 50%. These are unheard-of profit margins for a heavy manufacturer, which shows TSMC’s immense pricing power in the industry.
In the years ahead, spending on AI is expected to keep growing at an insatiable rate, fueling semiconductor demand. This will lead the dollars to flow to TSMC’s factories as it will need to pump out more and more computer chips for customers. In turn, this will lead to higher revenue and profit for the company.
At a price-to-earnings ratio (P/E) of 30 today, TSMC is at a reasonable price for a monopoly provider in an industry seeing a rapid surge in demand. TSMC has been a millionaire maker for investors in the past and can still be a millionaire maker for investors in the future.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brett Schafer has positions in Amazon and Coupang. The Motley Fool has positions in and recommends Amazon, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Coupang. The Motley Fool has a disclosure policy.
