What are platform stocks? Which are the best platform stocks to buy and how can they make you rich?
Uber is a platform business. So is Airbnb. At its core, a platform businesses connect consumers of products and services with producers of those products and services through a marketplace created and managed by the platform company.
The general idea is to build something so useful that you create a platform that turns into a quasi-monopoly.
CEO Alex Moazed of Platform consultant Applico defines a platform company as follows:
“Successful platforms facilitate exchanges by reducing transaction costs and/or by enabling externalized innovation. With the advent of connected technology, these ecosystems enable platforms to scale in ways that traditional businesses cannot.”
Moazed points out that S&P 500 pure-play platform businesses are valued at an average of 8.9 times revenue, significantly higher than traditional companies at 2-4 times sales.
It’s this reality that makes the Applico Platform Index (API) — a group of 27 platform companies that each have a market cap higher than $2 billion — so successful.
Over the past ten years, the API generated an annualized total return of 15.6%, 510 basis points higher than the tech-heavy NASDAQ, and a testament to the success of platform businesses.
Here are the 7 best platform stocks to buy right now.
7 Platform Stocks to Buy: Ritchie Bros. (RBA) Source: Shutterstock
Before I get into the more obvious platform stocks, I thought I’d go with a couple of index constituents that most investors wouldn’t name when rattling off platform companies.
Ritchie Bros. Auctioneers Inc (NYSE:RBA) is a Canadian company that got its start in the auction business in 1958 and has grown to annual revenues of $611 million by bringing buyers and sellers together to carry out transactions. In 2017, RBA transacted $4.5 billion in business by connecting these buyers and sellers, online and in person.
In the company’s fourth quarter, it saw revenues increase by 22% to $178.8 million as a result of its May 2017 acquisition for $777 million of IronPlanet, a California company that specializes in the sale of used heavy construction equipment.
On March 27, it launched Marketplace-E, a user-friendly digital platform that will make it easier for businesses to dispose of their assets.
Up 7.4% year to date through April 4, Ritchie Bros. platform solutions should continue to grow the business for years to come.
7 Platform Stocks to Buy: American Express (AXP) Source: Shutterstock
American Express Company (NYSE:AXP), along with Apple Inc. (NASDAQ:AAPL), were the APIs first two platform companies back in 1984, the date of the index’s inception.
American Express qualifies as a platform company because it operates a closed-loop network where it acts as both card issuer and bank cutting out the middleman.
Additionally, AXP launched Serve in 2011, a platform that enabled its customers to make person-to-person payments using their phone. In 2017, American Express announced that it was selling the U.S. distribution rights and technology of its prepaid reloadable and gift card products — including Serve — to InComm Holdings.
The platform technology was useful to AXP’s prepaid business. But it turns out the low-end customer didn’t generate enough revenue for it to keep distributing the Serve prepaid cards.
2017 was a transformative year for American Express for two reasons.
First, Ken Chenault retired as CEO of the company in October after 16 years in the job, passing the reins to Stephen Squeri. Secondly, it grew its business at a nice pace over the past year. Highlights include growing the total number of cards in force by 2.9 million and increasing the number of cardmember loans by 12% while adding 1.5 million new merchant locations.
All of that added up to total revenues of $33.5 billion and $7.4 billion in pretax income. Both numbers decent, if not spectacular results. As it continues to work on generating more revenue from each cardholder, I’d expect both the top- and bottom-line to improve in 2018 and beyond.
7 Platform Stocks to Buy: Apple (AAPL) Source: Shutterstock
Apple is the other original platform stock in the index. It operates a number of different platforms that connect the Apple user to the iOS ecosystem. If you own an iPhone, you know what I’m talking about. Whether it be the App Store, iTunes, Apple Music, iCloud or any of its other services, Apple products are tied into all of these.
I’ve recently considered buying a laptop. Most likely, I’ll buy an Apple product because of the iOS platform. It might be more expensive, but already owning an iPhone and iPad mini, I’m committed to it.
To get me off the Apple platforms the company either has to mess up the ecosystem and products colossally, or the competition delivers something so unbelievably useful I want to switch.
Personally, I don’t think either of those is going to happen. I’m not saying the competition is bad; just that they’re not lights out great. Tim Cook’s job is to deliver new products that are solid, if not spectacular, to feed the platforms, which continue to grow by double digits in terms of revenue.
People like myself will always be okay with just good, and that’s why Apple has the highest market cap in the world. Of all the platform stocks to buy, Apple is the one I’d recommend to buy-and-hold investors.
7 Platform Stocks to Buy: Microsoft (MSFT) Source: Mike Mozart via Flickr (Modified)
You can’t include Apple in a discussion about platform stocks without also talking about Microsoft Corporation (NASDAQ:MSFT). When it comes to platforms, they’re tied at the hip.
With Microsoft’s cloud and AI initiatives taking center stage at the company, the original Windows platform is looking like a tiny fraction of its overall business. It’s still an essential component through Office 365, but less so than a decade or even five years ago.
Microsoft just announced that it’s spending $5 billion over the next four years on the Internet of Things (IoT) devices. The key to any good platform is the level of connectedness it provides its customers and Microsoft knows it.
In an April 4 blog post, Microsoft Corporate Vice President Julia White wrote .
“Microsoft’s IoT offerings today include what businesses need to get started, ranging from operating systems for devices, cloud services to control and secure them, advanced analytics to gain insights, and business applications to enable intelligent action. We’ve seen great traction with customers and partners who continue to come up with new ideas and execute them on our platform.”
CEO Satya Nadella might be overpaid, but he sure is making a lot of smart moves at the house Bill built.
7 Platform Stocks to Buy: Redfin (RDFN) Source: Shutterstock
In November 2013, I recommended Zillow Group Inc (NASDAQ:ZG), suggesting “if you want to make a lot of money in 3 to 5 years, buying Zillow stock is a smart move.”
Over the past five years, its stock price has doubled, a good, if not spectacular return. Now considered relatively pricey, I thought I’d turn my attention to another real-estate stock on the index — Redfin Corp (NASDAQ:RDFN).
The company’s business model is simple.
It offers real estate agents a technology-enabled, vertically integrated real estate brokerage. It provides buyers and sellers a better experience for less. According to Redfin’s latest March presentation, if you sell a $500,000 home through them and then buy a $500,000 house through them, you’ll save $12,000 assuming the traditional listing-agent and buying agent fees are both 3%.
Houses sell faster through Redfin and for a better price. It’s technology disruption to the max.
“We expect the competitively compelling value prop and simplicity of the ‘1 percent’ product to resonate with consumers this year and potentially accelerate RDFN share gains,” D.A. Davidson analyst Tom White recently told clients in a note.
A good business always makes or saves people money. Redfin does both making it a winner in my books.
7 Platform Stocks to Buy: Amazon (AMZN) Source: Shutterstock
Despite President Trump’s assertion that Amazon.com, Inc. (NASDAQ:AMZN) is scamming the Post Office out of billions and cheating the Treasury Department out of significant taxes, it’s hard not to appreciate the platform Jeff Bezos has built since its founding in 1994.
People think Jeff Bezos wants to own online retail. And Amazon certainly has a big chunk of the market — the company generated 44% of the U.S. e-commerce sales in 2017. But that’s just a small part of a bigger picture.
Amazon doesn’t want to own online retail; it wants to own your home — figuratively, not literally.
I wrote March 2:
“Costco’s business model allows it to survive on razor-thin margins because of its annual membership. Through Prime, Amazon could do the same. Instead of offering just speakers, video streaming, doorbell cameras and all the other things it sells online, why not provide everything a homeowner (and renter) could need to keep the household functioning.
“Amazon could provide insurance, mortgages, wealth management, travel, legal advice, healthcare insurance (it’s on that), actual healthcare, the list goes on.”
Amazon’s biggest platform is Prime. That single membership will take the company much farther than merely focusing on e-commerce. Soon, Prime members are said to be getting a 10% discount when they shop at Whole Foods.
It’s not about online sales. It’s about total sales to the homeowner or renter. That’s exponentially larger.
7 Platform Stocks to Buy: Alibaba (BABA) Source: Shutterstock
Amazon is all about the home, but Alibaba Group Holding Ltd (NYSE:BABA) goes at this from a slightly different angle. It wants to provide all the platforms and big data necessary for small businesses to compete and thrive — both in its home country of China and around the world.
I neglected to mention AWS in the section about Amazon, the highly profitable piece of its business that helps businesses compete more effectively. I did so, in part, because I believe AWS got its start to provide the infrastructure necessary for AMZN to be a big player in e-commerce retail and moved beyond its walls when it realized it had more capacity at its data centers than it needed in-house.
Suffice to say, Amazon hasn’t forgotten about its business clients, but I digress.
Last May, I called Ma the next Jeff Bezos. Like Bezos, he wants to reinvent retail by owning the consumer, but he knows he can’t do that without successful small businesses. So, he’s building the same infrastructure that Amazon has such as the cloud, AI, data analytics, whatever it takes to understand what the consumer wants and needs and get it to them.
Eventually, the two companies could be only dominant global players in the business-to-consumer space. Amazon’s well ahead of Alibaba, but Jack Ma’s closing the gap. The next ten years should be exciting.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.