It’s possible to get rich quickly by investing in stocks, but it isn’t very likely to happen. In the stock market, time is one of investors’ greatest allies. Thanks to the magic of compounding, a relatively modest sum can turn into something much more substantial in just 10 years — provided of course that this money is invested shrewdly.
One key factor to consider before putting your hard-earned money into any company is whether it benefits from a competitive edge. Only under this condition can a stock deliver above-average returns in the long run. Two stocks that I believe have what it takes are Bristol Myers Squibb (NYSE: BMY) and Shopify (NYSE: SHOP). Let’s see why these two companies could make you richer in the next decade.
1. Bristol Myers Squibb
New York City-based Bristol Myers is one of the largest pharmaceutical companies in the world. And like its peers in the industry, its competitive advantage stems primarily from intellectual property rights, especially patents. These patents grant the company some degree of pricing power and protect its lifesaving medicines from biosimilar competitors. The drugmaker boasts a rich lineup, including no fewer than eight blockbuster products.
Most of these medications continue to grow their sales at a good clip. During the second quarter ended June 30, sales of cancer drug Revlimid — used for treatment of multiple myeloma — grew by 11% year over year to $3.2 billion. Meanwhile, revenue from anticoagulant Eliquis increased by 29% year over year to $2.8 billion while sales of Opdivo — which treats several kinds of cancers — came in at $1.9 billion, 16% more than the year-ago period.
These three medicines are the company’s best-selling products and will continue to spearhead its revenue and earnings growth for the foreseeable future. Yet, all patents do expire eventually, and so Bristol Myers boasts a deep pipeline. The pharma giant is running several dozen clinical trials, including many phase 3 studies.
Not all of these programs will pan out, but some of them will. According to estimates, about 59% of clinical compounds in phase 3 studies earn regulatory approval.
The ability to expand its product lineup will help Bristol Myers keep its revenue and earnings afloat even after some of its flagship products lose patent protection. And with $11.7 billion in free cash flow as of late July, the company is more than capable of acquiring promising programs from smaller pharmaceutical companies that lack the resources to fund the development of their pipeline candidates.
That’s why the healthcare giant is more than likely to perform well in the next 10 years. Investors who get in today would be buying its shares at a bargain. Bristol Myers is currently trading for just 8.4 times forward earnings compared to a forward price-to-earnings (P/E) ratio of 14.7 for the pharmaceutical industry. At current levels, this pharma stock looks like a great deal.
Value investors won’t find what they are looking for in Shopify, at least going by traditional valuation metrics. The company’s current forward P/E of 225 looks ridiculous by almost any standard. That said, high-growth stocks tend to boast scary valuation metrics. And in Shopify’s case, I believe this reflects its amazing potential.
The company’s platform allows merchants to create an online presence. It particularly focuses on small- and medium-sized businesses. Entrepreneurs can get everything they are looking for on Shopify thanks to the services it offers and its unique applications — some 7,000 in all — that help businesses customize their online presence in endless ways.
At the end of fiscal year 2020, Shopify had 1,749,000 merchants on its platform, nearly triple what it was at the end of 2017.
Shopify’s moat stems primarily from a good product and high switching costs. Businesses are unlikely to give up an online storefront they have spent a great deal of money and effort building, not to mention the disruption it could cause to a company’s operations. Shopify has already demonstrated its ability to acquire new customers rapidly — and thanks to its high switching costs, it can also keep them. That’s a recipe for success.
What’s more, there remains a long runway for growth in the industry. According to the U.S. Department of Commerce, e-commerce sales made up just 12.5% of total sales in the second quarter. E-commerce penetration is even lower in many developing nations. Meanwhile, Shopify currently boasts a 23% share of the market for the kinds of services it provides, making it the second-largest player in this space (after WooCommerce, an open-source plugin for WordPress).
For all these reasons, I fully expect the company to beat the market over the next 10 years.
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Prosper Junior Bakiny owns shares of Shopify. The Motley Fool owns shares of and recommends Bristol Myers Squibb and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.