The year 2020 has been a topsy turvy one for investors and has tried, as well as tested, the patience of both experienced and novice investors. The S&P 500 Index slumped over 35% in just a single month earlier this year. While the sell-off was unprecedented, the rebound over the last six months was equally surprising.
Now, the S&P 500 has returned 9.5% year-to-date. However, this resurgence has been primarily driven by stocks in the technology sector and the Technology Select Sector SPDR ETF (XLK) has gained an impressive 34.7% year-to-date, at the time of writing.
If there are any lessons to be learned in this volatile year, it is that investors should not try to time the market. While equities will remain unpredictable in the near-term, taking a long-term horizon will pay you handsomely.
Every single stock market crash is followed by a bull market rally that erases your losses and creates wealth. Patient investors benefit from the power of compounding if they are able to identify a few stocks that can generate exponential returns. Here we look at three such tech stocks that are a top buy for investors in 2021 and beyond.
An e-commerce behemoth
The first stock on this list is technology and e-commerce leader Amazon (AMZN). Shares of Amazon have gained 86% in 2020 and have returned a monstrous 2,100% in the last decade. So a $1,000 investment in Amazon stock back in October 2010 would have ballooned to $22,000 today.
While the traditional retail space has been severely impacted due to COVID-19, the pandemic has acted as a tailwind for internet retail players including Amazon. With businesses shut, people had no option but to shop online. This meant that e-commerce accounted for 16% of total retail sales in the U.S. at the end of the June quarter, up from 11% in 2019.
Over the last year, Amazon has increased its focus on improving its last-mile delivery and pumped in billions to expand its fulfillment network which will enable the company to improve delivery times.
According to a report by MWPVL, Amazon is looking to open 250 delivery stations this year, effectively doubling its count in 2020.
While the retail segment is Amazon’s cash cow, the company’s most profitable business is Amazon Web Services which is also the largest public cloud infrastructure platform in the world.
According to a Canalys report, AWS has a 31% share in the public cloud market and is followed by Microsoft that has a 20% share. In the second quarter, AWS sales were up 31% at $21 billion. While this business accounted for 13% of Amazon’s top line it raked in 65% of operating profits.
In the first six months of 2020, Amazon’s total sales were up 26% year-over-year at $164.4 billion while earnings per share rose by a healthy 24%. In 2020, Wall Street expects the company to increase sales by 31.5% to $369 billion while earnings growth is forecast at 38%. In the next five years, analysts expect earnings to increase by an annual rate of 36%.
These high growth metrics will help Amazon stock sustain its lofty price to sales multiple of 4.8x and an astonishing price to earnings multiple of 108.6x.
A payments disruptor
One of the fastest-growing stocks in the fintech space is Square (SQ), a company that provides hardware and software for businesses to accept digital payments. Square stock has returned an emphatic 196% in 2020 and is up 1,300% since its IPO in late 2015.
Square enables SMBs (small and medium businesses) to accept card payments which was an important capability in the past decade and now a major requirement. The company has expanded its product portfolio and has over 30 products and services that include the hugely popular Cash App.
In 2019, Square processed $106.2 billion in gross payment volume (GPV) with 2.3 billion card payments, up from just $6.5 billion in 2012. The GPV is the total amount spent on the Square platform by its partners or customers and the average spend per customer was $125,000 in the first six months of 2020.
The Square Cash App is a platform for users to send, receive, store, and invest their money. The monthly active customers on this platform have grown from $24 million in 2019 to 30 million at the end of Q2.
Revenue from the Cash App soared 140% to $325 million in Q2, making this peer-to-peer platform extremely important for the company.
Wall Street forecasts Square to increase sales by 228% to $7.45 billion while earnings decline is forecast at 30%. In the next five years, analysts expect earnings to increase by an annual rate of 36%.
A collaboration pioneer
The third and final stock on this list is the collaboration company Zoom Video Communications (ZM). The COVID-19 pandemic has accelerated the work from home trend by a few years, if not more, driving demand for Zoom products higher. Zoom stock has been on an absolute tear in 2020 and has gained a staggering 590% year-to-date. Zoom has easily been one of the top-performing stocks this year.
It has over 300 million daily active participants, up from just 10 million in 2019. This rapid influx of new customers largely triggered by the COVID-19 pandemic has helped Zoom increase its paid customers by 458% to 370,200 in the fiscal second quarter ended in July 2020.
In Q2, ZM’s total sales rose 355% year-over-year to $663.5 million while earnings growth was a whopping 3,050% at $0.63. The work from home trend is here to stay which means Zoom is likely to benefit from robust revenue growth in the upcoming decade.
Wall Street forecasts Zoom Video to increase sales by 286% to $2.4 billion while earnings growth is estimated at 600%. In the next five years, analysts expect ZM earnings to increase by an annual rate of 38.5%.
The final takeaway
The three companies are trading at a premium but this valuation is supported by their high growth forecasts. All three stocks on the list have expanding addressable markets, are coronavirus-proof, and have major secular tailwinds making them attractive to growth investors.
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AMZN shares were trading at $3,481.32 per share on Tuesday morning, up $38.39 (+1.12%). Year-to-date, AMZN has gained 88.40%, versus a 10.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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