Many tech stocks easily weathered the COVID-19 crisis this year, as stay-at-home trends boosted the usage of cloud services, streaming media, social networks, e-commerce services, and tools for remote work. The tech-heavy Nasdaq stock index rallied 40% this year as the S&P 500 advanced just 15%.
But with so many tech stocks trading near all-time highs, investors might be tempted to avoid this hot sector. Investors should definitely avoid overpaying for overheated stocks like Snowflake -- but they should still consider buying reasonably valued tech stocks that still have room to run.
Let's take a look at three tech stocks that should remain solid buys for 2021 and beyond.
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1. Netflix
Netflix (NFLX 1.60%) grew its paid subscriber base 23% year over year to 195.15 million last quarter, making it the world's largest premium video streaming platform by a wide margin.
Its revenue and earnings rose 25% and 73% year over year, respectively, in the first nine months of 2020. Its free cash flow (FCF) also turned positive in the first quarter and increased sequentially in the second and third quarters.
Netflix expects its revenue and subscribers to both grow about 20% year over year in the fourth quarter. Analysts expect its revenue and earnings to rise 24% and 52%, respectively, for the full year.
A lot of Netflix's growth can be attributed to the pandemic, which caused people to stay at home and stream more videos. Its production of original content also wasn't meaningfully disrupted by the pandemic, while major Hollywood studios struggled with delayed productions and releases.
Analysts expect Netflix's revenue and earnings to rise by 18% and 44%, respectively, next year. It will face tough comparisons as the pandemic passes, but it should remain far ahead of its rival Walt Disney's streaming service Disney+, which hit 73.7 million paid streaming subscribers last quarter.
Unlike Disney, AT&T, and many other streaming service providers, Netflix's streaming platform remains consistently profitable. Netflix's stock might not seem cheap at 57 times forward earnings, but its scale, diverse portfolio, and robust growth rates easily justify that slight premium.
2. Snap
Snap's (SNAP 0.04%) social platform Snapchat grew its daily active users 18% year-over-year to 249 million during the third quarter. That robust growth rate nixed the notion that Snapchat was losing users to Facebook's Instagram, ByteDance's TikTok, and other social platforms.
Image source: Getty Images.
Snap's average revenue per user also rose 28% year over year during the quarter, as its growing ecosystem of lenses, videos, and games locked in more users. It also remains the top social network for U.S. teens, according to Piper Sandler's latest survey, while TikTok ranks second and Instagram ranks third. The average price of Snap's ads also continues to rise, thanks to Snapchat's popularity among Gen Z and millennial users.
Snap's revenue rose 38% year over year to $1.6 billion in the first nine months of 2020, and its adjusted EBITDA loss narrowed from $245 million to $120 million. Its FCF also improved from negative $266 million to negative $156 million.
Analysts expect Snap's revenue to rise 42% this year as its adjusted net loss narrows. Next year, they expect its revenue to grow another 42% with its first annual non-GAAP profit. Based on those estimates, Snap trades at just over 20 times next year's sales -- which is significantly cheaper than many other recent tech IPOs with comparable growth rates.
Snap's stock could remain volatile next year as it faces fresh challenges from Instagram and TikTok, but Snapchat could still have plenty of staying power in this competitive market.
3. Microsoft
Microsoft's (MSFT -3.81%) stock nearly quadrupled over the past five years as the company pivoted toward cloud services under a new CEO.
Satya Nadella, who took the helm in 2014, steered Microsoft toward a bold "mobile-first, cloud-first" strategy that reduced its dependence on desktop software, developed more mobile apps, and expanded its Office 365, Dynamics 365, and Azure cloud services.
Those three platforms now power its commercial cloud business, which generated over a third of its revenue in fiscal 2020 (which ended on June 30). Azure, the segment's fastest-growing division, is now the world's second-largest cloud infrastructure platform after Amazon Web Services (AWS).
Nadella also expanded Microsoft's Surface business, which sparked the development of new form factors in the sluggish PC market, and strengthened its gaming ecosystem with new Xbox consoles and subscription services.
Microsoft's revenue and adjusted EPS grew 14% and 21%, respectively, in fiscal 2020. The pandemic throttled Microsoft's software sales to enterprise customers, but that softness was easily offset by its cloud and gaming businesses -- which both benefited from stay-at-home trends.
Analysts expect Microsoft's revenue and earnings to rise 11% and 18%, respectively, this year. The stock might seem a bit frothy at 32 times earnings, but several catalysts -- including the Xbox Series X and S, Azure's ongoing expansion, and the rebounding PC market -- could justify that premium. Its low cash dividend payout ratio of 31% also gives it plenty of room to raise its paltry forward dividend yield of 1% in the future.
