Who says mega-cap stocks -- those with a valuation of over $200 billion -- can't provide huge returns? The Vanguard Mega-Cap Growth ETF (MGK 1.00%) increased 40% in 2020 due to its slant toward technology. With the world hastened into a new digital age because of the pandemic, 2021 could be another great year for big tech stocks. Three Fool.com contributors think salesforce.com (CRM 0.06%), Intel (INTC 0.58%), and Alphabet (GOOGL 0.77%) (GOOG 0.69%) will be well worth your while.
A fair price for the future of work
Nicholas Rossolillo (Salesforce): Shares of cloud computing pioneer Salesforce were up over 60% at one point in 2020 as the company continued to grow even though many of its customers have been deeply impacted by the pandemic. Far from the days when this was a niche developer of customer relationship management software, Salesforce has become an integral part of daily operations for a growing list of organizations around the world.
Not surprisingly, returns moderated and the stock will finish out 2020 up "only" 37% on the year. What I do find surprising is how negative some investors have gotten on the company after its announced intention to acquire work collaboration tool Slack (WORK). Salesforce is highly acquisitive, and CEO Marc Benioff and company often use its soaring stock price as a type of currency to acquire other high-growth technology names. Slack is no exception here, with about 40% of the deal to be funded with Salesforce stock. And while many investors aren't comfortable with acquisitions, Salesforce has a history of making deals like this work -- bolting on other software services to its core customer relationship platform to enhance its offering.
But Slack will be Salesforce's largest purchase yet, and there is concern that Slack -- which faces stiff competition from the likes of Microsoft (MSFT 0.85%) Teams -- isn't a good fit. I'd argue to the contrary. Benioff has been clear for a long time about his ambitions to make his company one of the largest in the world, and making the transition from Salesforce the software vendor to Salesforce the heart of an organization's technology stack will require some help. Specifically, Salesforce will integrate the remote collaboration tool across all of its products and make Slack the default interface for its "Customer 360" product -- a singular place for users to connect an organization's apps, data, and customer information, all the while collaborating with co-workers from afar.
If Salesforce can make it work, it could be a transformational move, one that Benioff expects will make his company "the operating system for the future of work." I like the ambition, even if it stomps on the toes of big names like Microsoft that already dominate the operating system and basic tech platform market. With a history of making acquisitions like Slack add up to more than the sum of their parts, I'm bullish on Salesforce headed into the new year and as effects of the pandemic start to ease.
This fallen giant will not stay down
Anders Bylund (Intel): Semiconductor titan Intel had a difficult year in 2020, even though the chip sector as a whole absolutely crushed the S&P 500's returns this year. The contrast is flat-out startling:
At the end of the year, Intel shares are trading at historically low valuation ratios. You can pick up Intel shares for less than 10 times adjusted earnings, less than 10 times free cash flows, and roughly 2.5 times trailing sales. All of these metrics are running near their 10-year lows. They are also far below the valuation ratios seen in other large semiconductor stocks, including well-worn value investments such as Texas Instruments (TXN -0.33%) and Analog Devices (ADI 0.14%).
This makes sense only if you believe that Intel's manufacturing hiccups in 2020 are a sign of imminent doom. The stock should be cheap if Intel were on a hopeless path to total collapse.
That's not what's happening here. Intel's stock is way too cheap right now, and the shares you buy today are incredibly likely to be worth much more by the end of 2021.
Armed with an ironclad balance sheet, an unmatched network of in-house manufacturing facilities, and the industry's largest research and development budget, Intel is poised to make a full recovery as soon as this year's manufacturing issues have been corrected. Management says that we should expect Intel's 7-nanometer process to be fully operational in 2021, getting the company's famous tick-tock cadence back on track again. At the same time, Intel is exploring new target markets such as 5G-powered Internet of Things devices, self-driving cars, and telehealth.
This fallen giant won't stay down for long. Intel is going places in 2021 and investors are invited to enjoy the ride.
Believe it or not, Alphabet is a reopening stock, and still cheap
Billy Duberstein (Alphabet): Google parent Alphabet was one of my top stocks for 2020, and you know what? I still like it for 2021.
Sure, the company has been buffeted by the COVID-19 pandemic, which hit ad revenues hard in the first and second quarters. And yes, the company is squarely in the sights of antitrust regulators in the U.S. and abroad. However, that also may explain why Alphabet looks rather cheap compared to its peers right now. Given that antitrust trials aren't slated to begin until 2023, it should be business as usual for Alphabet for quite a while.
Meanwhile, Alphabet's core advertising revenue rebounded more strongly than expected in the third quarter, up almost 10% over the prior-year quarter. Even more impressive, the "Google other" division, which is a mix of YouTube subscriptions, app store sales, and hardware, surged 35.3%. The ascending Google Cloud platform grew an even higher 44.8%. Importantly, management noted on the recent conference call that the underlying Google Cloud platform IaaS service is growing faster than the overall segment, which also includes software like G Suite.
If Google Cloud were valued like a stand-alone software-as-a-service company, it could be worth 20, 30, or even 40 times sales, given that level of growth. Given that the segment is on track to make about $13 billion in revenue this year, one could easily value Google Cloud between $260 billion and $560 billion right now! Currently, Alphabet's total market cap is less than $1.2 trillion, or about $1.06 trillion, excluding cash.
Alphabet also may have significant value hidden in its "other bets" segment. The autonomous driving unit Waymo raised money early this year at a $30 billion valuation just before the pandemic hit. However, given what other EV and new-age technology stocks have done this year, it's not hard to think that value would be much higher today. Additionally, Alphabet's Verily Life Sciences unit is likely quite valuable as well, as it's using new technologies to solve big medical problems, and even has a unit dedicated to COVID-19 testing and solutions. And Alphabet's other bets segment also includes its venture arm and later-stage growth investment arms, with billions under management.
Meanwhile, Alphabet's "core" business should continue to recover with the economic reopening next year, as travel and experience-related advertisers return to Google's platforms. The core Google business has made nearly $30 billion in operating income through the first three quarters of this year despite the pandemic, on the way to $40 billion or more this year and accelerating to mid-teens growth next year.
Given the neglected cloud and other bets business, a core business that should reaccelerate in 2021, and increasing share repurchases, Alphabet is still looking like a great value among large-cap tech going into the new year.