The S&P 500 has gained about 14% in 2020, but many technology stocks easily outpaced the market this year as investors looked to this sector as a haven during the pandemic.
NVIDIA (NASDAQ:NVDA), Atlassian (NASDAQ:TEAM), and Roku (NASDAQ:ROKU) have all seen their share prices rally more than 50% this year, but these companies could still bring more gains for long-term investors. Here's why they're still buys in the coming year.
NVIDIA: Multiple gale-force tailwinds driving growth
Danny Vena (NVIDIA): When you mention NVIDIA and its graphics processing units (GPUs), thoughts immediately turn to video games -- and for good reason. The company is the undisputed leader in the discrete desktop GPU market, commanding an 80% share in the second quarter of 2020. NVIDIA's best-in-class processors are the top choice of die-hard gaming enthusiasts and account for nearly half the company's total revenue.
However, it's NVIDIA's data center segment that should have investors most excited, as the company has established a foothold in several large and fast-growing markets that provide the most significant upside going forward. This includes artificial intelligence (AI), data centers, and cloud computing.
Researchers found that the parallel processing capability -- or the ability to run multiple complex mathematical calculations simultaneously -- which allows GPUs to render lifelike images in video games, also makes it a workhorse when it comes to the demands of AI.
These sophisticated AI algorithms combined with NVIDIA's high-speed processors can sift through millions of data points and detect patterns that would otherwise be missed. This has led to big advancements in business analytics, voice recognition, user profiling, natural language translation, and image recognition, among many others.
The rapid deployment of AI and the accelerating shift to cloud computing has made NVIDIA GPUs a staple in the world's biggest cloud computing operations and data centers. That's not hyperbole, either. NVIDIA's customer list reads like a who's-who of cloud computing, including Amazon Web Services, Microsoft Azure, Alphabet's Google Cloud, and Alibaba Cloud, to name just a few.
If 2020 has taught us anything, it's that the adoption of cloud computing will only continue to accelerate, as the pivot to remote work exposed the limitations of our current way of doing things. The pandemic shined the spotlight on the need for business continuity, which will only increase the demand for cloud computing in the years ahead.
The worldwide public cloud market is expected to grow 18% in each of the coming two years, topping $362 billion by 2022, up from just $257 billion this year, according to Gartner. This helps illustrate the size of the opportunity that remains.
NVIDIA's pole position in these large and growing markets was evident in the company's recent financial results. Third-quarter revenue grew 57% year over year to a record $4.73 billion. While the gaming segment grew a respectable 37%, the headliner was data center revenue, which soared 162% to $1.9 billion and accounted for 40% of total revenue.
AI, cloud computing, and data center growth have helped drive NVIDIA's stock up 123% this year (as of this writing), and it shows no signs of slowing. With this trifecta of gale force tailwinds, NVIDIA is a buy for 2021 and beyond.
Atlassian: Team-powered growth
Brian Withers (Atlassian): Atlassian's mission is to "unleash the power of teams." Its software tools enable project teams to collaborate, software developers to coordinate code releases, and information technology organizations to support software its products after release. With this broad set of products, it specializes in landing customers with a free trial, and expanding their use as they share the tool with their teammates -- and eventually upgrade to a paid version.
Given its mission and products, it should be no surprise that its stock symbol is TEAM. This team-powered stock has been on a tear in 2020, more than doubling since the first of the year. But this collaborative software specialist is just getting started.
Not only do its products appeal to information technology and software development teams, but its products are also being used increasingly by non-technical teams. Today, almost 50% of its top-selling products (Jira and Confluence) are being used by functions outside of information technology. These non-technical customers almost double the addressable market by adding an additional $11 billion of annual spending to the $13 billion market for software teams. With $1.7 billion in trailing-12-month revenue, the company has only tapped about 7% of its total addressable market that is growing at 9% a year.
The company has recently announced the end of support for its on-premise server products and is moving its customers to its cloud or "cloud-ready" versions of its software. This move may cause some short-term slow-down in top-line growth as 30,000 server customers (out of more than 182,000) migrate to new versions. But in the long run, this move will enable its development resources to focus entirely on its cloud platform.
At 18 years young, Atlassian is still founder-led by co-CEOs who take a long-term view. It has plenty of cash on the balance sheet, a strong history of growth, and an ever-expanding set of software tools that are becoming must-haves with the work-from-anywhere trend that isn't going away. For patient investors who share in its founder's long-term perspective, this team's stock is still a buy in 2021.
Streaming for the masses
Chris Neiger (Roku): Roku had a very impressive 2020 as people spent more time in their homes watching TV. The company's platform allows televisions to connect to the internet and easily access nearly any video streaming service. Investors took notice and drove up Roku's share price 166% this year.
This means that subscribers of Disney+, Netflix, HBO Max, or any other service can use Roku's platform to access those subscriptions. Roku makes money through advertising and when someone signs up for a streaming service through its platform.
The company's latest quarter shows just how well Roku performed this year. Revenue increased 73% in the third quarter, active customers spiked 43%, and average revenue per user was up 20%, all year over year. And long-term entertainment trends should keep Roku growing.
Consider that Roku just inked a deal with AT&T to bring the telecom's HBO Max service to Roku's platform. This matters because HBO Max will release movies to both theaters and its streaming service simultaneously. It's a massive shift for at-home entertainment and if others in the industry follow suit it could be a boon to Roku's platform.
But Roku doesn't even need blockbuster films on its platform. The company is already benefiting from the massive cord-cutting trend. Six million people left traditional pay-TV services this year and more than one-third of Americans will have cut the cable and satellite cord by 2024. When they do, these viewers typically sign up for streaming services that can be accessed on Roku's platform.
While the pandemic may have accelerated the use of Roku's platform, new entertainment choices like blockbuster releases on streaming services will lead even more people to Roku. And long-term trends like cord-cutting should keep them on the company's platform for years to come.