Everybody gets that feeling of wanting a do-over from time to time, especially when it comes to managing money. If you had the opportunity to go back and do things differently with the knowledge you have now, you know the outcome would likely be far more lucrative.
Going back in time is, of course, impossible. What you could do, though, is learn from the investing journeys of these three Motley Fool contributors. If these three had to build a stock portfolio from scratch starting with $15,000 right now, they would split the money across DigitalOcean (DOCN), Veeva Systems (VEEV -0.94%), Shopify (SHOP 2.50%), as well as an S&P 500 index fund. Here’s why these three stocks have their attention.
The future of the economy is digital
Anthony Di Pizio (DigitalOcean): If I had to make a series of investments today, I’d start by identifying industries that are primed for growth over the next decade (and beyond). Then, I’d zero in on quality companies within those sectors — that’s how I landed on the small cloud computing powerhouse DigitalOcean. It’s competing against giants like Amazon Web Services and Microsoft Azure, and it is succeeding.
What does DigitalOcean do? It provides cloud services to businesses, helping them do simple things like store data online and host a website. It also does more complex operations like developing software and streaming video content to customers. DigitalOcean specializes in serving small to midsize businesses with fewer than 500 employees, which is a segment of the cloud market the larger providers sometimes overlook.
The company sets itself apart from competitors by offering pricing models that suit businesses that are either starting up or are early in their lifecycle. Plus, it delivers a more personalized level of service, which is helpful when scaling up from scratch.
Over the last four quarters, DigitalOcean generated $533 million in revenue, most of which came from its 142,100 customers who spend at least $50 per month. But that’s a mere fraction of what DigitalOcean estimates is a $72 billion market at the moment, so it has substantial room for growth.
Plus, the broader cloud market is set to explode in value for the remainder of the current decade. By 2030, Grand View Research estimates it could be a $1.5 trillion opportunity each year, which makes DigitalOcean a great place for your money over the long term.
Laying the foundation
Jamie Louko (Veeva Systems): Building a portfolio is much like building a house: The most vital aspect is a solid foundation. Portfolio foundations should be built with stable companies that could still be thriving decades from now, like Veeva Systems.
The company provides cloud-based software and data storage tools mainly to pharmaceutical and biotech companies, and with numerous tools getting adopted by many of the top 20 largest pharmaceutical companies in the world, Veeva leads the pack in terms of dominance. It also has products for businesses of all sizes. If you’re a start-up looking for an end-to-end drug trial management tool, Veeva has you covered. But it also has customer relationship management tools and a data cloud for the largest of businesses.
In short, Veeva is there for any pharma company at any point in their lifecycle, and as they grow, their usage of Veeva can expand in line. That’s why the company had over 100 customers using eight or more commercial tools and over 200 customers using five or more research and development products as of the second quarter of fiscal 2023.
Once the software gets built, it takes little cost to allow more customer access, so the widespread use of Veeva resulted in incredible profitability. Over the trailing 12 months, Veeva posted a free cash flow margin of 37% and a net income margin of 19%.
Veeva could provide a level of safety and stability for the long haul because of its dominance in the pharmaceutical industry. However, it can also deliver growth over the coming years. Veeva sees a total addressable opportunity worth $13 billion ahead. Considering the company made just $2.1 billion in trailing-12-month revenue, Veeva clearly has room to take a greater hold of the market. That’s why I would invest in Veeva if I were building a portfolio from scratch.
The market leader in e-commerce software
Trevor Jennewine (Shopify): If I had to start investing from scratch, I would split my available funds 75/25 between an S&P 500 index fund and Shopify stock, respectively. The S&P 500 index fund would instantly diversify my portfolio, providing exposure to a variety of blue-chip American businesses across all 11 market sectors. In other words, buying an S&P 500 index fund is like buying a slice of the U.S. economy, which is why Warren Buffett has long been an advocate of that investment strategy.
Meanwhile, the investment thesis for Shopify is straightforward: The Canadian commerce company serves as the central nervous system for millions of businesses around the world. Its software helps merchants manage sales across physical and digital stores. It also provides adjacent solutions for payment processing, financing, and shipping, and the company is building a fulfillment network that will support two-day delivery from virtually any sales channel — online marketplaces like Amazon and Etsy, social media like TikTok, and direct-to-consumer websites — for buyers around the world. No other commerce company offers that convenience.
Shopify first gained traction with small businesses, but the company is successfully pushing upmarket with Shopify Plus, a customizable commerce platform for larger brands. In the past year, innovations like machine-learning-powered marketing software and business-to-business (B2B) commerce tools have made Plus an even more compelling option for merchants, while expanding Shopify’s addressable market.
For instance, U.S. retail e-commerce sales are expected to grow at 12% annually to reach $1.7 trillion by 2026, while U.S. B2B e-commerce sales are expected to grow at 10% annually to reach $2.5 trillion over the same period. That is particularly noteworthy because Shopify accounted for 10.3% of U.S. retail e-commerce sales in 2021, making it the second-largest digital retailer in the country behind Amazon. Shopify is also the most popular e-commerce software vendor, according to research company G2, which means it is well-positioned to benefit as digital retail continues to gain momentum.
Currently, shares of Shopify trade at 8.8 times sales, a discount to the three-year average of 35.2 times sales. That creates an attractive entry point for investors.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. Jamie Louko has positions in Amazon.com, Etsy, Shopify, and Veeva Systems. Trevor Jennewine has positions in Amazon.com, Etsy, and Shopify. The Motley Fool has positions in and recommends Amazon.com, DigitalOcean, Etsy, Microsoft, Shopify, and Veeva Systems. 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.