2 Great Starter Stocks for New Investors

If you’ve just started investing, learning how to buy stocks and knowing which stocks are worth buying can be an overwhelming process. But developing a strategy can be a good place to start.

For instance, I look for companies that have some type of advantage over their rivals, such as a more efficient cost structure, a better product, or a larger user base. Regardless, companies with a competitive advantage tend to outperform the pack, which can lead to big gains for shareholders.

With that in mind, both Amazon (NASDAQ:AMZN) and salesforce.com (NYSE:CRM) look like good stocks for new investors to buy. Here’s why these two companies offer a good start for your portfolio.

Image source: Getty Images.

1. Amazon: The e-commerce giant

Amazon is a great example of a company with a strong advantage. Since it was founded in 1994, Amazon has transformed itself from an online book retailer to the largest online marketplace in the U.S.

Today, the company leads the pack with a commanding 39% market share. In other words, 39% of all online sales in the U.S. (in terms of dollars) flow through Amazon. For perspective, second-place Walmart has just 5.8% market share. What’s more, Amazon actually controls 13% of the global e-commerce market, ranking the company second behind China-based Alibaba. That massive scale means Amazon generates more revenue than its rivals, which in turn allows Amazon to invest more heavily and grow its business more quickly than its competition.

Additionally, in Amazon’s early days, the company developed a range of valuable infrastructure services (computing, storage, content delivery) to support its growing marketplace. Those early efforts were the foundation of Amazon Web Services (AWS), the company’s cloud computing business. Notably, Amazon officially launched AWS in 2006, beating Alphabet‘s Google and Microsoft to the market by two and four years, respectively. And that first-mover advantage has helped AWS capture 32% of the global cloud computing market. 

Amazon’s incredible scale and ironclad competitive position across industries have translated into strong growth in both revenue and profit.

Metric

2017

2020

CAGR

Revenue

$177.9 billion

$363.1 billion

27%

Net income

$3.0 billion

$21.3 billion

92%

Data source: Amazon SEC filings. CAGR: compound annual growth rate.

However, Amazon’s past performance is only half of the puzzle. The other piece is what comes next. And Amazon is well-positioned to maintain its leadership in e-commerce and cloud computing. Moreover, the company may extend its empire into new markets like digital advertising and logistics. In other words, despite being a $1.7 trillion enterprise, Amazon still has room to grow.

2. Salesforce: The customer relationship specialist

Salesforce is the top dog when it comes customer relationship management (CRM). The company’s Customer 360 platform helps clients collect data from various customer interactions, then makes that information available to all teams within an organization, from sales and customer service to commerce and marketing. This enables those teams to provide a coordinated, high-quality customer experience.

According to the International Data Corp., Salesforce controls nearly 20% of the global CRM market, while second and third place rivals Oracle and SAP have only 5.3% and 4.8%, respectively. But Salesforce didn’t simply get lucky — innovation has been key to the company’s success.

Back in 1999, before many people had ever heard of cloud computing, Salesforce started delivering its CRM software through the cloud. In other words, Salesforce was one of the very first enterprises to offer software-as-a-service (SaaS), a business model that has since revolutionized the software industry.

For enterprises, SaaS models reduce variable costs associated with traditional approaches to providing software to retailers. SaaS also allow enterprises to scale very quickly since the software (and potential updates) can be delivered almost instantly to any connected location around the world. Ultimately, this has helped Salesforce build a business with growing revenue and a high gross margin, both of which should lead to increased profitability as the company expands.

Metric

2017

Q3 2021 (TTM)

CAGR

Revenue

$8.4 billion

$20.3 billion

27%

Gross margin

73.4%

74.5%

N/A

Data source: Salesforce SEC filings. Note: Q3 fiscal 2021 ended Oct. 31, 2020. TTM = trailing 12 months. CAGR = compound annual growth rate.

Salesforce also benefits from companies’ desire to avoid high switching costs. To understand this, imagine you need to switch cellphone service providers. At the very least, you’ll have to cancel your existing service, pick a new provider, and set up a new account — that’s going to take time and effort. And you might come to the conclusion that it’s easier to stick with what you’ve got.

Well, the same rules apply to CRM software vendors. It takes time to switch providers and learn a new system. Moreover, Salesforce’s CRM platform is essentially an industry standard, which means changing providers would likely be a downgrade. The end result is that Salesforce keeps a large percentage of its customers. In fact, the company’s churn rate was less than 9% in fiscal 2020, meaning the company kept over 91% of its clients.

Going forward, management estimates Salesforce’s market opportunity at $175 billion by 2025, meaning the company has plenty of room to grow. And as the world becomes more digital, building and maintaining good customer relationships will become increasingly important. That should be a strong growth driver for Salesforce.