Despite unprecedented challenges, strong performance for leading technology companies has helped push indexes including the S&P 500 and Nasdaq to record highs this year. However, there's still plenty of uncertainty on the horizon, and prudent investors will likely want to assess the factors behind the huge stock gains and consider whether there are still strong bullish cases for some of this year's market darlings.
We asked three Motley Fool contributors to profile a hot technology stock and weigh in on whether it still offers attractive upside after posting impressive gains. Read on to see whether they think Cloudflare (NET -1.85%), Amazon.com (AMZN -4.03%), and NVIDIA (NVDA -0.74%) are still worthwhile buys in the current market climate.
Is this high-flying cloud software stock in a bubble?
Keith Noonan (Cloudflare): Cloudflare has been the best-performing stock in my portfolio this year and one of the hottest technology stocks on the market. The cybersecurity and content delivery network (CDN) specialist entered the year with a market capitalization of roughly $5 billion, but its share price has surged roughly 393% year to date, and the company now has a market capitalization of roughly $26 billion. That kind of performance is incredibly rare.
With more commerce and communications moving to digital channels this year in response to the coronavirus pandemic, Cloudflare enjoyed surging demand for its cybersecurity and CDN services. The company's sales growth in 2020 has far exceeded targets from management and Wall Street analysts, and the business has continued to post fantastic gross margins that point to huge profit potential down the line.
Cloudflare has also been rolling out new features and service offerings, some of which look capable of driving big growth over the long term. In a September roundtable discussion with my colleagues Joe Tenebruso and Will Healy on potentially explosive tech stocks, I outlined how the company's industry-leading web security and CDN solutions laid the foundation to launch additional services that could power huge share price gains. The company introduced a comprehensive new enterprise networking security service in October, causing its stock to skyrocket.
The breakthrough new service arrived earlier than I anticipated, and I missed out on the chance to buy more of the stock before it enjoyed another explosive run. Cloudflare's recent performance has surprised me, but it's in line with my original investment thesis, and I think that the gains are justified.
Does Cloudflare's incredible run and growth-dependent valuation lay the foundation for a substantial pullback for its share price at some point? Most reasonable investors would probably say that it does. However, I also think that its stock price and market capitalization will eventually climb significantly above current levels, and it's not too late to enjoy strong returns with this category leader.
The online retail and cloud titan
Joe Tenebruso (Amazon.com): Amazon is one of the biggest winners of 2020. The e-commerce colossus has seen its sales and profits soar during the coronavirus pandemic, as traditional retail store closures and social distancing measures have driven more people to shop online.
Amazon Web Services (AWS) is also growing like gangbusters during the pandemic. Companies are rapidly shifting their business processes to the cloud, so as to better enable their employees to work remotely.
In all, Amazon's revenue surged 37% year over year to $96.1 billion in the third quarter. Its operating profits, meanwhile, rocketed 96% higher to $6.2 billion. Amazon's stock price, in turn, has rallied 67% so far in 2020.
Yet plenty more gains lie ahead for Amazon's investors. Millions of people who have shopped online for the first time during the pandemic will continue to do so. Many of those who experienced Amazon's massive selection of goods, low prices, and convenient shipping options will remain loyal customers. And those companies that have joined AWS are unlikely to leave for a competitor, due to the cloud service's reliability, as well as Amazon's propensity to reduce prices over time.
Thus, investors can expect the e-commerce and cloud giant to continue to grow at a solid clip in the coming years -- and those who buy shares today should be well rewarded.
NVIDIA won't stop scoring, but it could pause
Will Healy (NVIDIA): Gaming stock NVIDIA has risen by more than 120% in 2020. Bolstered by an increased interest in gaming and semiconductors during the pandemic, NVIDIA has shot higher like many tech peers. However, the up-and-coming revenue driver for the maker of graphics processing units (GPU) has become data centers.
In the most recent quarter, the third quarter of fiscal 2021, revenue increased by 57% from year-ago levels. This is thanks in large part to its data center business, which grew revenue by 162% over the same period.
Still, despite that gain, NVIDIA stock pulled back slightly following the announcement on Nov. 18. It expects data center revenue to fall from Q3 levels.
In Q3, the data center division accounted for $1.9 billion of the company's $4.7 billion of revenue. Hence, one might understand why such news might unnerve investors going into 2021.
Nonetheless, whether one considers NVIDIA a buy depends on time horizons. The company has not made projections for the next fiscal year. Still, analysts predict revenue will rise by about 20%.
While impressive, this is a far cry from the 57% growth reported in the most recent quarter. Moreover, the forward P/E ratio of around 47 is well ahead of the long-term average of 35. Given the increase seen in 2020, NVIDIA stock could take a breather in 2021.
However, investors need to remember that NVIDIA's chips remain competitive in fast-growing areas of tech, such as data centers and artificial intelligence. This alone should keep NVIDIA in the game for years to come.