There's little doubt that investing in well-run companies and holding their stocks for the long term is one of the surest paths to financial security. What you may not know is that technology stocks have outperformed the broader market going back more than 10 years. Over the past 12 months, while the S&P 500 has gained 12%, and the Dow Jones Industrial Average is up nearly 14%, the NASDAQ Composite -- which is made up primarily of technology stocks -- is up more than 21%. That difference is even starker over the past decade, as the NASDAQ is up more than 200%, more than doubling the returns of the S&P 500 and the Dow Jones.
With that in mind, we asked three of our Motley Fool investors to choose technology companies they believe represent compelling values right now. Read on to find out why they chose Activision Blizzard (ATVI +0.00%), PayPal (PYPL 0.51%), and Okta (OKTA 0.44%).
Image source: Getty Images.
Multiple growth engines
Danny Vena (Activision): Video game stocks have been on fire, and for good reason. The phenomenon of the battle royale genre -- which pits many players against each other in a Hunger Games-style, winner-take-all battle, has been bringing new gamers into the fold. While it may be either the beginning of a longer-term shift or a short-lived fad, many of these newly initiated video game players will likely stick around to populate the next generation of gamers.
One company positioned to reap outsized rewards from this trend is Activision Blizzard. The company, which is known for such hits as Call of Duty, World of Warcraft, and Candy Crush, has eight franchises that have produced more than $1 billion each in sales. The growing stable of popular games ensures that Activision's future doesn't depend on the success or failure of any single title or franchise.
The company has shown a knack for providing compelling updates that continue to draw new players. Call of Duty, as an example, was originally released in 2003 and continues to be a hit with fans. The latest version, Call of Duty: Black Ops 4, is scheduled to debut in October and is one of the most highly anticipated game releases of the year. Activision recently revealed that the game will incorporate a battle royale mode called Blackout in its upcoming release.
An even more compelling draw for investors is the exploding popularity of esports, which turns video gaming into a spectator sport. The company's recently launched Overwatch League is poised to capitalize on the genre, having sold 12 teams in its inaugural season for $20 million each. The buy-in is expected to rise as the league expands to an anticipated 28 teams, with new entrants paying between $30 million and $60 million each.
Image source: Activision Blizzard.
Each of these factors contributed to record results in the most recent quarter, growing revenue by 13% and earnings per share by 14%, both year over year.
A growing pool of potential players, a stable of successful franchises, and a significant investment in the growing popularity of esports all make Activision a top tech stock to buy now.
The shift to digital payments is afoot
Chris Neiger (PayPal): If you're anything like me, whenever you use cash to pay for something it feels like some archaic transaction. I mean, we've been using coins for thousands of years! Physical cash has had a great run, but it's far past time to move on -- and that's what PayPal is helping us do.
You've likely used PayPal to facilitate an online payment, or you've at least seen the option across many websites and businesses. PayPal proliferation has grown because it's been busy adding more ways to get users to pay through its platform by forging new partnerships with banks and merchants, and that's led to fantastic growth.
Image source: PayPal.
In the first quarter of this year PayPal's revenue jumped 24% year over year to $3.69 billion, net income popped 33%, and the company's total payment volume (TPV) -- which is the value of all payments made through the company's payment platform -- was up 32% to $132 billion.
That's fantastic growth, but PayPal's not finished yet. The company is just getting started in the person-to-person (P2P) payment market. You may have heard of the company's uber-popular P2P app called Venmo, which allows users to do things like easily split the check at dinner, reimburse roommates for rent, and pay back your friend for Willie Nelson tickets (that last one might be from personal experience).
eMarketer estimates that P2P payments like these will total $156.5 billion this year and jump to $244 billion by 2021. That's excellent news, and PayPal is already benefiting. Venmo payment volume was up 80% in the first quarter to $12.3 billion.
PayPal is experiencing strong organic growth across its businesses, but the company has also made a handful of recent acquisitions to help it grow even faster. Its purchases of a payment processing company based in Europe (iZettle) and an AI payment platform company (Jetlore) should help PayPal continue to outpace its competition. The company also just snatched up a fraud prevention company called Simility to help protect customers and merchants when they exchange sensitive payment information.
PayPal's shares trade at about 30 times the company's forward earnings, which is a bit more expensive than the average P/E ratio for tech stocks. But PayPal has proven that it can grow its business at a rapid pace and investors should remember that we're just at the beginning of the shift to digital payments -- which means there's plenty of room left for PayPal to grow. Coins and paper money beware.
A disruptive security specialist
Jeremy Bowman (Okta): If you hate constant password updates and other annoying security protocols, I have some good news for you. There's a way you can profit from it.
Okta (pronounced -- Ahk-tuh) calls itself the leading independent provider of identity for the enterprise. Its cloud-based platform allows users to seamlessly and securely connect to a range of devices, programs, and technologies, and since identity and security is the only thing Okta does, it's a platform-neutral product, allowing easy integration with other applications and services. It counts companies like 20th Century Fox, Adobe, and Jet Blue among its clients.
Image source: Okta.
The company has barely been public for a year but has already delivered impressive results as shares have more than doubled since its IPO last April. Strong growth and the realization of the massive opportunity in cloud-based software have driven Okta's growth recently.
However, the stock experienced a surprising pullback following its first-quarter earnings report earlier this month despite strong results. Revenue in that period jumped 60%, easily topping the company's own guidance of 49%-50% growth. The strong growth in revenue was also impressive as it came in spite of slowing growth in marketing spending, its biggest expense and one the company will have to control in order to turn profitable. It also beat its own guidance on the bottom line as its net loss narrowed.
Considering that performance, the resulting sell-off was surprising, and seems to offer an excellent entry point for new investors. At the time of writing, the stock is still down more than 18% off its 52-week high at $61. With ample opportunity in front of it and strong momentum, I'd expect Okta to break through that ceiling in no time.
