by Key Points
Investing in technology stocks involves a certain level of risk, so it's important for investors to consider competitive advantages before making a purchase.
Coupang is a major e-commerce company in South Korea that has achieved significant growth.
Taiwan Semiconductor Manufacturing is the top supplier of cutting-edge semiconductors for artificial intelligence, facing very little rivalry.
- 10 stocks that we prefer over Coupang ›
Everyone enjoys putting money into the latest and most advanced technology. However, the challenge lies in the fact that investing in state-of-the-art technology can be dangerous, as there is ongoing innovation that might threaten your business approach. Consider asking current investors in software firms about their concerns regarding artificial intelligence (AI)-created coding and its potential impact on their rivals.
If you plan to invest in technology, it's essential to concentrate on identifying companies that have competitive advantages, or strong competitive moats within their operations. This can be achieved through economies of scale, a traditional competitive advantage that often results in long-term leadership for a company within an industry. Here are two technology stocks that have significant economies of scale, which are likely to support their growth over the coming years.
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Coupang's meteoric rise
Everything that Amazonhas been done in the United States,Coupang (NYSE: CPNG)is being replicated in South Korea. At times, it may appear that way when tracking the company. Coupang is an online shopping platform in South Korea that offers both first-party and third-party sales, maintains its own delivery and storage system, and has a growing advertising and streaming video business.
In truth, I would contend that Coupanghas improvedRegarding Amazon's delivery approach, if you believed that was ever feasible. Shoppers who sign up for Coupang's Rocket Wow subscription enjoy free shipping that can be delivered by 7 a.m. the following day if purchased before midnight. It offers quick fresh food delivery, along with professionals who can set up appliances and automotive parts bought through the Coupang platform.
All of these services are made possible due to Coupang's significant investments in infrastructure within South Korea. In the last quarter, Coupang's revenue increased by 21% year-over-year in constant currency, while gross profit rose at a faster pace of 31% year-over-year. The company is making substantial investments for growth, yet it still achieved an operating income of $154 million during the quarter, compared to $7.9 billion in revenue.
Coupang still has significant room to increase its market presence in South Korea. However, it is starting to evolve into a comprehensive technology company. This involves expanding into new regions, such as Taiwan, where the company is experiencing fast revenue growth by applying its e-commerce strategy. Recently, it officially launched its Intelligent Cloud computing service, following a strategy similar to Amazon's. The current scale of Coupang's cloud business remains uncertain, but with substantial investment in cloud companies related to AI, there is considerable potential in this area.
Today, Coupang is trading at amarket cap$55 billion. Possessing significant potential to grow its e-commerce and subscription services throughout East Asia, the company has the opportunity to achieve annual revenue of $100 billion or higher in the near term, as opposed to $31 billion in the past twelve months. With increasing profit margins, this positions Coupang as an attractive stock to purchase now and a potential path to wealth for those who plan to hold it for the long term.
Manufacturing prowess for AI
The second stock on my list benefits from even greater economies of scale compared to Coupang:Taiwan Semiconductor Manufacturing (NYSE: TSM). The semiconductor and computer chip producer — commonly referred to as TSMC — leads in advanced systems used for artificial intelligence. Its primary clients include the likes ofNvidia, Apple, and Qualcomm.
TSMC allocates approximately $35 billion each year for constructing facilities that manufacture computer chips, with more than $100 billion in planned investments within the United States. Combined with its significant contracts with suppliers and clients, this substantial capital expenditure provides TSMC a major competitive edge in terms of scale compared to its rivals. Indeed, no other company is capable of matching TSMC's advanced semiconductor production at such a large scale, which means TSMC faces minimal competition.
As one would anticipate, TSMC's income has started to rise sharply due to the unquenchable need for AI computer chips. Net revenue increased by 35% compared to the previous year, reaching $25.5 billion in the last quarter, with operating margins nearing 50%. Such unprecedented profit margins are rare for a heavy manufacturer, highlighting TSMC's significant pricing influence within the sector.
In the coming years, investment in artificial intelligence is projected to continue increasing rapidly, driving up the need for semiconductors. This will result in more financial resources flowing into TSMC's manufacturing facilities as they must produce an ever-increasing number of computer chips for their clients. Consequently, this will boost the company's revenue and profitability.
With a price-to-earnings ratio (P/E) of 30 currently, TSMC is considered reasonably priced as a dominant player in an industry experiencing a sharp increase in demand. TSMC has previously generated significant wealth for investors and continues to have the potential to do so in the future.
Is it a good idea to invest $1,000 in Coupang at this moment?
Prior to purchasing shares in Coupang, take this into account:
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John Mackey, the former chief executive officer of Whole Foods Market, which is now owned by Amazon, serves on the board of directors for The Motley Fool.Brett Schaferholds positions in Amazon and Coupang. The Motley Fool has investments in and advises on Amazon, Apple, Nvidia, Qualcomm, and Taiwan Semiconductor Manufacturing. The Motley Fool suggests Coupang. The Motley Fool has adisclosure policy.
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