2 top ASX 200 pick-and-shovel stocks to consider

Mark Twain's quip that during the gold rush, "it is a good time to be in the pick and shovel business" has turned into a key tenet of investing. So, does the ASX 200 have any sound pick-and-shovel stocks?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Mark Twain's quip that during the gold rush, "it is a good time to be in the pick and shovel business" has long ago percolated into an Aesop's fable of investing.

Does the ASX 200 have any sound pick-and-shovel stocks?

What is a pick-and-shovel strategy?

During a gold rush, sourcing and selling shovels is less labour intensive and hazardous than prospecting for gold. Many will venture out, but few will strike it rich. Yet both the lucky and the unlucky alike will need picks and shovels.

It still takes a shovel for a prospector to realise he's out of luck.

Therefore, a pick-and-shovel strategy can grant you a safe steady stream of income from customers who take on most of the risk.

It aims to capitalise on stocks providing necessary inputs for an end product without incurring the risks associated with selling the final product itself.

Examples of pick-and-shovel stocks

Apple has wider brand recognition than a company like Intel. Yet it is Intel that quietly manufactures the processors found in most of the world's personal computers.

While rivals like Apple, HP, Dell, and Lenovo vie for shares of the personal computing market, all of them will have to source their processors from the likes of Intel.

The fortunes of many of these companies will ebb and flow as one or the other releases a hot new product. Yet all the while, Intel will pocket a handy sum from each.

Take Amazon Web Services (AWS). While its name may be unassuming, nothing is modest about its profits. AWS supplies cloud-computing infrastructure to the likes of Netflix, Slack, NASA, and even the CIA. In FY18, it reported a vertiginous US$25.7 billion in net sales. 

However, pick-and-shovel stocks are not always a successful investment play.

In market contexts where there are only one or two buyers, suppliers of necessary tools or services will struggle to leverage that necessity into good profits.

Why? Because the bargaining power will not be with them. That's why you hear reports from disgruntled and struggling suppliers over the Coles Group Limited (ASX: COL) and Woolworths Group Ltd (ASX: WOW) duopoly.

Pick-and-shovel stocks of the tech sector

Australia's tech sector has seen enormous growth in recent years, led by the WAAAX cabal. And information technology will continue to inform the interconnected enterprise of this digital age, so it's fruitful to search for pick-and-shovel stocks in the tech sector.

But are there any to be found in the ASX 200?

Altium Limited (ASX: ALU)

Altium is a leader in printed circuit board (PCB) design tools and its share price is up 50%, year to date. Altium's market leader status in PCB design tools positions it favourably for the explosion in AI and Internet of Things applications.

In its latest investor presentation, Altium reported that the "proliferation of electronics through the rise of smart connected devices continues to drive growth for our business" as PCB are central to the "design and realisation of electronics."

In FY19, Altium reported continued revenue growth, up 23% to $171.8 million with a healthy EBITDA margin of 36.5%.

Dawn Kanelleas and Michael Joukhador of First Sentier Investors (previously Colonial First State Global Asset Management) recently wrote that "for every traditional device that is redesigned to talk to other devices – and for every new device brought to market – there sits an engineer heavily reliant on Altium."


NEXTDC is Australia's leading data centre operator, primed to leverage its infrastructure in today's data-hungry world. It already boasts strategic partnerships with leading tech companies Amazon, Microsoft, Google, IBM, Oracle and Alibaba.

A 2018 report by IDC predicted that the "global datasphere will grow from 33 Zettabytes (ZB) in 2018 to 175 ZB by 2025." This will create an exponential demand for storage and data centres like NEXTDC.

The report went on to say that the "responsibility to maintain and manage all this consumer and business data supports the growth in cloud provider data centers."

Not only that, advisory firm Gartner predicts that by 2025, 80% of enterprises will shut down their in-house data centres, preferring to pay specialised firms like NEXTDC for colocation and cloud access.

Importantly, Gartner estimated that only 10% of enterprises have closed their in-house data centres. This means that suppliers like NEXTDC should expect a large flock of new customers over the coming years.

These considerations were enough for Morgans to upgrade NEXTDC shares to an add rating, with a $6.68 price target.

Further, according to the Wall Street Journal's analyst ratings, 10 out of 11 analysts currently rate NEXTDC a buy, with the remaining analyst deeming it a hold.

Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Technology Shares

A graphic image of the world globe surrounded by tech images is superimposed on the setting of an office where three businesspeople are speaking together while standing.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

ASX technology shares led the market with a 2.8% gain this week.

Read more »

A happy elderly couple enjoy a cuppa outdoors as the woman looks through binoculars.
Technology Shares

Could the Xero share price leap a further 35% as profits begin to flow?

An expert has predicted this tech stock to make strong returns.

Read more »

chip and tech stocks represented by two computer chips side by side
Technology Shares

This little ASX AI stock is soaring 10% today. Here's why

Investors are piling into the ASX AI stock on Friday. But why?

Read more »

Smiling man with phone in wheelchair watching stocks and trends on computer
Technology Shares

What are analysts saying about Xero shares following its blockbuster results?

Here's what Goldman Sachs is saying about this tech stock after it delivered a very strong result.

Read more »

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Growth Shares

Forget Nvidia: This ASX growth stock is poised for its own bull run

I think this ASX growth stock could beat the phenomenal share price gains posted by Nvidia.

Read more »

flying asx share price represented by man flying remote control drone
Share Gainers

Up 246% in a year, here's why the Droneshield share price is racing higher again today

ASX investors are sending the Droneshield share price soaring today. But why?

Read more »

a group of people sit around a computer in an office environment.
Technology Shares

Is this ASX 200 tech stock in the buy zone following its results?

Is now a good time to snap up this top tech stock? Let's see what a leading broker is saying.

Read more »

A man sees some good news on his phone and gives a little cheer.
Technology Shares

Why are Brainchip shares racing higher after its AGM?

This struggling semiconductor stock is having a good session. But why?

Read more »