Sometimes investors can draw parallels from other fields of study to help inform their investing decisions. One that comes to mind is from the realm of science -- Newton's first law of motion: An object in motion tends to stay in motion unless acted upon by an outside force. That same premise can be applied to investing in successful companies. Put another way, winners tend to keep winning.
There's a special breed of company that operates from a market-leading position, is riding significant secular tailwinds, and is focused on a large addressable market that can combine to provide the momentum necessary to drive the business to new heights.
With that in mind, my two highest conviction stocks for 2021 have already delivered significant gains over the past year, but I believe they have all the elements in place to handsomely reward investors over the coming decade and beyond.
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A chip off the old block
When it comes to industry-leading positions, investors are no stranger to NVIDIA (NVDA +5.56%). The company boasts a massive 80% share of the discrete desktop market for graphics processing units (GPUs). NVIDIA's high-end processors are a must-have for any serious gamer, leaving its rivals to fight over the leftovers.
While the GPUs used in gaming have long been the foundation of NVIDIA's success, it's the company's next-generation processors that will drive growth into the future. The chips' superpower is parallel processing, or the ability to handle a host of complex mathematical calculations simultaneously. Over the past several years, researchers found that the parallel processing that enabled GPUs to render lifelike images in video games also made them a workhorse when applied to the unique challenges of artificial intelligence (AI). This ties right into NVIDIA's dominance in another big growth area: Cloud computing.
The acceleration in the adoption of cloud-based systems has been a boon to NVIDIA, as its GPUs are also a staple in nearly every major cloud computing operation, including such notable leaders as Amazon's AWS, Microsoft's Azure Cloud, Alphabet's Google Cloud, International Business Machines' IBM Cloud, and Alibaba Cloud -- and that's just the headliners. The lightning-fast processing speeds and ability to power AI make NVIDIA GPUs indispensable in data centers worldwide.
The company's data center segment, which also includes processors used in cloud computing and AI, has become NVIDIA's biggest growth engine, with revenue that grew 162% year over year in the third quarter, and now accounts for 40% of its total revenue. That's not all. The company is also generating promising growth in the areas of professional visualization and self-driving cars.
Put that all together and it represents a massive opportunity. NVIDIA estimates that its addressable market will total $250 billion by 2023. NVIDIA generated just $15 billion in revenue over the trailing 12-month period, illustrating the size of the opportunity that remains.
Image source: Getty Images.
The streaming revolution will be televised
Roku (ROKU +7.29%) has long been a leader when it comes to aggregating streaming choices. While the company has consistently trailed Amazon's (AMZN +3.51%) Fire TV in terms of users, that all changed recently. While the e-commerce giant boasted 50 million users to close out 2020, Roku said its user base had climbed to 51.2 million. Not only that, but Roku's growth is accelerating just as Amazon's is slowing. Fire TV users grew 25% year over year, while Roku viewers jumped 38%.
It would also be hard to find a stock with more secular tailwinds driving it forward than Roku. The hastening of cord-cutting is one such trend. The cable industry shed 4.9 million customers in 2019, accelerating from 2.87 million subscriber defections in 2018 and 1.51 million in 2017. It also marked the largest single-year decline in pay-TV history.
The phenomenon of cord-cutting goes hand-in-hand with the rise in streaming video. The global streaming video market is expected to top $184 billion by 2027, growing at more than 20% annually. Roku's channel agnostic platform, which offers more than 10,000 streaming options, offers not only all the biggest, high-profile paid streaming services, but also thousands of ad-supported, niche offerings as well.
Image source: Getty Images.
Roku's Trojan horse is the company's Roku Operating System (OS), which it licenses to television manufacturers so they don't have to reinvent the wheel. It's so popular in North America that Roku is the No. 1 connected TV OS in both the U.S. and Canada, with Roku-branded TVs controlling 38% and 31% of the market, respectively.
The decline in traditional broadcast and cable TV has also highlighted the growing opportunity in digital advertising, particularly in the connected-TV market, another trend feeding Roku's growth. Marketers are following the migration of their viewing audience from broadcast to streaming, playing to Roku's strength. The company gets a cut of the advertising for every channel accessed via its platform. In the third quarter, Roku's monetized video ad impressions grew almost 90% year over year.
It's no coincidence that Roku's platform segment, which is comprised of advertising, The Roku Channel, and OS licensing, makes up the lion's share of Roku's revenue, growing 78% year over year in the most recent quarter. At the same time, total revenue grew 73%.
Finally, there's the company's massive opportunity. Roku's total addressable market, which was estimated at $535 billion in 2019, is expected to climb to $769 billion by 2024. Taken in the context of Roku's $1.54 billion in revenue over the trailing 12-month period, the size of the opportunity is clear.
Data by YCharts
You get what you pay for
It's important to note that Roku has only just turned profitable, as the company has been expanding rapidly to capture its share of the fast-growing streaming market. Eagle-eyed investors will no doubt point out that neither company is cheap using traditional metrics, as Roku sports a forward price-to-sales of 23, while NVIDIA's is an only slightly more palatable 20.
The high sticker price hasn't stopped investors from paying up for the combination of impressive topline growth and the potential for explosive stock gains that lie ahead.
