Investing in technology stocks isn't for everyone, but it should be. While the S&P 500 is up an impressive 16% over the past year, the Nasdaq Composite -- made up primarily of tech companies -- has gained more than 23%. That isn't an anomaly, either. Over the past decade, while the S&P has jumped more than 130%, the Nasdaq has nearly doubled that, soaring 251%. Returns of that nature can have life-changing implications, so all investors should at least consider including some tech stocks in their portfolios.
With so many companies focused on technology, making the right choices for your portfolio can be daunting. With that in mind, we asked three Motley Fool contributors to identify tech stocks that they believe have significant upside. Read on to find out why they chose Zuora (ZUO -0.22%), Micron Technology (MU -4.61%), and Amazon (AMZN -2.56%).
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Powering the future "subscription economy"
Brian Stoffel (Zuora): Tien Tzuo was employee No. 11 at Salesforce.com. Software as a service is in his blood; he helped shape the highly profitable model from the outset.
One thing he noticed during his time at Salesforce was the backroom trouble the company -- and players in legacy Enterprise Resource Planning (ERP) software -- had when it came to billing systems and revenue recognition bookkeeping. He left Salesforce to exploit that opportunity with Zuora.
Tzuo's aim is to help companies transition to the subscription economy. And this doesn't just include tech companies. In Zuora's first conference call as a public company, Tzuo walked investors through how a port-a-potty company (you read that right) was able to benefit from transitioning to a subscription model with Zuora's help.
Customers start with Zuora Central Platform. This helps companies do basic things like collecting subscription data, pricing different plans, and managing unique accounting that comes with subscription revenue. Over time, customers can add several other tools like Zuora CPQ (Configure Price Quote), which helps organize and streamline different subscription packages for a sales team; Zuora Collect, which helps manage all revenue collection in one place; and Zuora RevPro, a deeper accounting tool that helps with regulatory compliance.
Since setting up shop in 2006, the company has grown to serve over 950 companies, include 15 Fortune 100 members. Annual subscription revenue (the only one investors should really monitor, as service revenue is not a moneymaker and is intended solely to onboard customers) has grown by 33% per year since the end of 2015, to $143 million. That growth is due mostly to large contracts (those worth over $100,000 per year), which have grown by 96% in just over two years to a total of 474.
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The most important metric for investors is the company's dollar-based retention rate. This measures how much money all of the customers from Year One spend in Year Two. For the most-recent quarter, that figure stood at 112% -- meaning that customers are not only staying with Zuora, but also adding more products over time.
Technology's building blocks are on sale
Nicholas Rossolillo (Micron): August was a momentous month for the semiconductor industry, but not in a good way. After struggling through 2018 with a looming U.S.-Chinese trade war, some Wall Street analysts panned chipmakers, citing the highest inventory levels in years. Yet, forward price-to-earnings ratios for the industry are also the lowest in years, sitting at a modest 12.8 at the middle of August.
Shares of memory manufacturer Micron haven't gone unscathed. Despite posting another solid quarter back in late June, the stock has been in decline. Granted, it is still up 28% year to date; but with a 12-month trailing and forward P/E ratio of 5.3 and 4.5, respectively, the company is valued well below the industry average.
Micron stock could fetch a lower valuation for various reasons, including the company's burden of debt, the fact that memory chips are a commodity product prone to wild swings in supply and demand, and a legal battle in China that has resulted in the temporary ban on the sale of some of Micron's products. However, strong demand for digital memory the last couple of years is putting Micron in position to aggressively pay down debt and return cash to shareholders. Work to differentiate and specialize memory products has also been an ongoing effort, and the China ban represents only a little over 1% of Micron's revenue.
Image source: Micron.
It would therefore appear that the stock is priced for a worst-case scenario when some of the looming issues are workable. With Micron set to report results for its fiscal fourth quarter on Sept. 20, it's worth keeping an eye on this one.
So many was to succeed
Danny Vena (Amazon): It might seem counterintuitive to buy a stock that just crossed a $1 trillion market cap, making it the second most valuable company in the U.S. -- particularly when it's sitting near all-time highs. That said, Amazon isn't your ordinary company.
Best known as the preeminent purveyor of e-commerce goods, Amazon has grown to be the largest online seller in the world and the sixth largest retailer, according to Deloitte's Global Powers of Retailing 2018 report. The digital powerhouse leapfrogged four spots from the prior-year report, and will likely gain several more spots by the time the next report is completed.
Amazon Prime topped 100 million subscribers earlier this year, and with the company's biggest Prime Day ever in the books, that number has likely grown considerably since then. These members are some of Amazon's best customers, spending $1,400 annually, compared to the $600 spent by the average shopper.
Image source: Amazon.
If that was all Amazon had going for it, that would be enough. But several other growth areas could significantly boost revenue in the coming years.
The most obvious catalyst is Amazon Web Services (AWS), the company's cloud computing platform. After increasing revenue by 43% year over year in 2017, that growth has accelerated so far this year, with sales jumping 49% compared with the same period last year -- even as cloud competition from the likes of Microsoft and Alphabet's Google has increased. Some believe that AWS could triple over the coming five years.
Amazon's recent focus on advertising could represent another massive opportunity. Advertisers are increasingly interested in reaching the company's growing shopper base, and Amazon's user data could help target those ads more effectively. Advertising revenue has already topped $2 billion in each of the previous two quarters, with growth rates topping triple digits.
Add in the advantages gained from its brick-and-mortar bookstores, Whole Foods, and the dominance of its Echo smart speakers, and it's easy to see several ways Amazon's share price could double in the coming years.
