These 3 Tech Stocks Are Set Up for a Monster 2021

The stock market has put up some very impressive gains this year and part of its success has come from technology stocks. Tech companies, in general, have done well in 2020 as investors looked for stocks that could thrive during lockdowns and social distancing. 

With multiple coronavirus vaccines on the horizon and hopes that the pandemic will subside in 2021, some investors are looking ahead and trying to decide which tech stocks will be the best bets for the coming year. To help you find a few of them we asked three Motley Fool contributors for stocks that they believe are poised for more growth in 2021. They came back with Roku (ROKU 1.24%), Square (SQ 0.77%), and Appian (APPN +0.31%). Here's why. 

Image source: Getty Images.

Roku: The go-to for streaming

Danny Vena (Roku): Streaming video was already coming into its own before the pandemic, when lockdowns and stay-at-home orders made it a must-have for in-home entertainment. The number of streaming video subscribers surpassed cable TV for the first time in 2018 and cord-cutting is accelerating, so there's simply no going back. As the leading aggregator of streaming video channels, Roku (ROKU 1.24%) has the most to gain from the trend and has set itself up for a monster year in 2021.

Roku provides access to all the high-profile streaming services, including Netflix, Amazon's Prime Video, and Walt Disney's namesake service, Disney+, but it doesn't stop there. The platform offers more than 10,000 streaming apps and hundreds of live-TV channels. As a result, Roku offers more streaming choices than any other platform. 

The streaming pioneer gets a percentage of the advertising shown on all the ad-supported channels on its platform, as well as a cut of the monthly subscriptions from paid services when customers sign up using Roku. The company also gets all the advertising from its own streaming offering, The Roku Channel.

One of the most underappreciated weapons in its arsenal is the Roku smart TV operating system (OS). The company built a dedicated OS from the ground up, rather than settling for a repurposed mobile app, the solution used by many rivals. The ease of use and intuitive user interface made it the choice of a growing number of TV manufacturers that license the system. As a result, the Roku OS was found in one in three connected TVs sold in the U.S. last year, and one in four in Canada. This gives the company an installed base of devices that's second to none. 

The advertising, The Roku Channel, and OS licensing create a trifecta of platform segment revenue, which is driving Roku's wildfire-like growth. In the third quarter, revenue jumped 73% year over year, led by the platform segment, which climbed 78%. At the same time, its active users grew 43% and average revenue per user (ARPU) increased 20%. User engagement continues to grow, as viewers watched roughly 3.5 hours per day, on average. That resulted in a total of 14.8 billion viewing hours, an increase of 54%. 

Roku made several announcements in recent weeks that bolster its standing as the streaming leader. The company released a limited edition $17 Roku SE streaming player, just in time for the holidays. Roku also made the long-awaited announcement that it had finally struck a deal with AT&T to carry its flagship service, HBO Max. Roku used its cache of 46 million viewers to leverage a more favorable deal with HBO on the eve of the pending release of Wonder Woman 1984.

There's little doubt that 2020 was a banner year for Roku, but given the company's momentum and trajectory, 2021 could be an absolute monster.

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Square: All (eco)systems go

Brian Withers (Square): Square started with a simple concept of enabling small businesses to take in-person credit card payments with a small square-shaped device attached to a merchant's mobile phone. Over time, the company has expanded its services for sellers into an entire ecosystem of applications to enable businesses large and small to run their operations. In the last few years, the company has also added the Cash App. This growing business segment is focused on providing individual consumers with and ecosystem of digital banking and brokerage services. Over the past year, these two ecosystems have been on different paths.

The coronavirus has accelerated the Cash App's popularity. More customers are flocking to the tools and adopting more services and making more transactions. This has driven this segment's gross profits to record highs. Its triple-digit gross profit growth has even accelerated in the last two quarters. Note that Square uses gross profit as a key metric to compare its segments because revenue from its bitcoin sales can distort the trends of the underlying business segments.

Data source: Square earnings releases. YOY = year over year.

On the other hand, the coronavirus has negatively impacted sellers. Small businesses have struggled with store closures and decreased spending in brick-and-mortar establishments. The company has tried to help sellers by releasing new platform capabilities such as online ordering and curbside pickup. This has helped, but growth rates have significantly slowed as compared to pre-coronavirus growth levels. 

Data source: Square earnings releases. YOY = year over year.

As a result, the seller ecosystem has dropped from 75% of total gross profits in the third quarter of 2019 to 52% in the most recent quarter. But there are signs that things are starting to improve for Square's sellers. The most recent quarter saw seller gross profits grow 29% sequentially to a record $409 million. This was the first quarter since the coronavirus hit that this segment saw positive sequential growth. This increase was primarily driven by a 50% growth in online sales, strong international sales, and a consistent level of new customers coming on board over the last two quarters.

Looking ahead, things should only get better for both of these segments. As the coronavirus vaccines get distributed, consumers should be more comfortable venturing out, which should enable sales from small business to grow at a faster pace. Within a year, I wouldn't be surprised to see seller gross margin growth in the 20%-plus range again. As for the Cash App, its triple-digit growth rates will most likely slow down, but its record-setting revenue and gross profit trend will continue.

As the seller ecosystem growth becomes healthier, the company's overall level of gross profits will hit record levels, too. With both the ecosystems set up to achieve new highs in 2021, investors should be able to share in the success, too.

Image source: Getty Images.

Tapping into the app boom

Chris Neiger (Appian): When Apple's App Store debuted in 2008 it had just 500 apps. Now, the App Store has 1.96 million apps and Google's Play Store has 2.9 million. As demand for apps continues to grow Appian is making it easier than ever for companies to build their own. 

Appian's low-code software development platform helps companies of all sizes build their own apps without the need for code-writing expertise. This makes app-building far more accessible to companies and lowers the barrier for creating new apps quickly. And the app business is booming.

Appian's sales jumped 17% in the most recent quarter, led by a 40% jump from the company's cloud subscription revenue. The company expects its cloud subscription sales to continue growing and finish the full-year 2020 up 34% from the year-ago quarter.

While the company has performed well this year -- pushing its stock price up 297% year to date -- the company believes the same trends that have accelerated in 2020 will continue into next year. Appian CEO Matt Calkins said on the company's third-quarter earnings call, "I expect strong workflow or process management, if you prefer, will be a primary differentiated feature in both of our core markets, low-code, and automation, in 2021, and Appian is well-positioned to benefit from that trend."  

The mobile app market is continuing to grow, expanding from a $106.2 billion market in 2018 to an estimated $407.3 billion market by 2026. Appian is still in the early stages of tapping into the low-code app development trend and investors looking for a fast-growing tech company to invest in 2021 (and beyond) would be wise to give this company a closer look.