In spite of seemingly insurmountable odds, stocks managed a more-than-respectable 16% return in 2020, as measured by the S&P 500 index. And with a glimmer of hope on the horizon now that COVID-19 vaccines are in production, 2021 could be another good year for investors. Technology in particular has a bright future ahead of it as the world contends with new challenges brought on by the pandemic.
A growing cybersecurity firm at a relative value
Nicholas Rossolillo (Fortinet): Legacy cybersecurity firm Fortinet has been my favorite investment among security-software stocks for a while now. But calling it a "legacy" firm is a little disingenuous. This is still a fast-growing outfit, deriving virtually all of its 19% year-over-year sales growth (through the first nine months of 2020) from organic development of new products and services. The "legacy" stigma gets attached because Fortinet isn't growing nearly as fast as cloud-native computing (and more narrowly focused) security names like Zscaler (NASDAQ: ZS) and CrowdStrike Holdings (NASDAQ: CRWD).
But this company is putting up respectable numbers in its own right and is a growth-at-a-reasonable-value investment. In addition to its robust sales growth through three quarters of 2020, free cash flow was $684 million -- also up 19% from last year and good for a free-cash-flow margin of 37%. Paired with the $1.66 billion Fortinet has on its balance sheet and zero debt, this is a rock-solid name in the cybersecurity world.
Fortinet put up solid results during the pandemic thanks to its expanding stable of subscription-software services, especially cloud computing aimed at helping large organizations transition away from their old IT infrastructure. In conjunction with that, Fortinet also sells best-in-class firewall hardware (a device that monitors data coming into and going out of a network) for data centers. Because of the pandemic, many security vendors specializing in firewall hardware struggled in 2020. Not Fortinet. It's hardware sales bucked the trend and grew 14% last year, a testament to the high quality of its tech, as many of its customers grow increasingly reliant on data centers for their day-to-day operations.
Between growth from cloud software and its portfolio of data-center security, Fortinet looks primed to continue its steady expansion in 2021 and beyond. And trading at 30 times trailing 12-month free cash flow, the stock looks like a reasonable value compared to some of the high-flying names mentioned above. I remain a buyer at these levels.
Sink your FAANGs into Google
Anders Bylund (Alphabet): Alphabet, Google's parent company, is a fantastic long-term investment at nearly any price. You should be buying Alphabet shares today, even though the stocks are trading at all-time highs after a 23% gain in 52 weeks.
I know, I know -- the law of large numbers says that huge companies must grow more slowly than their smaller rivals. Alphabet is an industry titan, sporting a $1.2 trillion market cap and $172 billion of annual sales. Surely, the company will hit a brick wall of saturated markets someday soon, and the stock would be guaranteed to follow suit. Right?
Well, I'm not so sure. What started as a search engine wrapped in advertising services has branched out into an ever-growing number of adjacent markets. Google owns Android, the world's most popular smartphone platform. YouTube has 30 million premium paid subscribers and another 5 million users checking out the ad-free video service through free trials. Google Cloud has grown into a leadership position in the cloud-computing market, delivering 45% year-over-year sales growth in the third quarter of 2020. On top of all that, ad buyers still see Google as the best place to spend most of their ad budgets. This growth story is far from over.
Furthermore, Alphabet isn't afraid to tackle dramatic market changes. Looking beyond the evolving cloud-computing and YouTube businesses, Alphabet is exploring dramatically different ideas, such as self-driving cars, medical research, and a balloon-based network that provides internet service in developing and underserved markets.
If you don't own Alphabet shares yet, this would be a great time to go ahead and fix that unforced error. This incredible FAANG stock will serve you well for decades to come.
The most important tech company today
Billy Duberstein (Taiwan Semiconductor Manufacturing): Sure, it's not exactly cheap after an amazing run, but there's a good case to be made that Taiwan Semiconductor Manufacturing (TSMC) is the most important company in the world right now. In that case, it should probably be on the list of core technology holdings for any investor, along with the more well-known and popular FAANG stocks.
Earnings expectations were already high for Taiwan Semiconductor heading into its Q4 results released Thursday, and Taiwan Semi reported another strong quarter, with revenue growing 22% year over year, and both gross margins and operating margins coming in significantly higher than expected.
Even more shocking was Taiwan Semi's guidance for its capital expenditures (CAPEX) this year, which management said would be between $25 billion and $28 billion, a whopping 42% to 62% increase over 2020. Keep in mind, 2020 had already seen a 10% surge in CAPEX spend over a strong 2019 spend even amid COVID-19. Taiwan Semi has done an excellent job of under-promising and over-delivering in the past few years, so that massive capital spending plan means management sees huge growth prospects ahead.
That's not a surprise. Two years ago, Taiwan Semi leapt ahead of both Intel (NASDAQ:INTC) and Samsung in the race to produce 7nm chips. While Intel and Samsung are still struggling with yield issues, Taiwan Semi is already ramping up 5nm chips, which are inside the iPhone 12 and made up 20% of revenue last quarter. With TSMC pulling ahead in capability to produce the most advanced semiconductors, the U.S. government is now subsidizing a TSMC plant in the U.S., and even Intel is likely to outsource some of its chipmaking to TSMC, its main rival.
Technology inflections are usually much more powerful than your typical competition in other sectors due to the difficulty of technology processes as well as massive global scale. Though TSM has more than doubled over the past year, it still should be a core holding for any large-cap tech portfolio.