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Looking for Tech Stocks? These 3 Are Great Buys

By Trevor Jennewine - Feb 4, 2021 at 8:15AM

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Tech stocks have been on fire lately, but investors haven't missed their chance.

Over the last five years, tech stocks have been red hot. Stocks in the information technology sector have returned an average of 27% per year, crushing the 14% average yearly return of the broader S&P 500.

But if you missed out, don't worry -- it's not too late. The upward run in prices for some tech stocks is far from over.

Here's why Twilio (TWLO 4.31%), Etsy (ETSY 0.51%), and Microsoft (MSFT -0.37%) still look like smart tech stocks to buy.

1. Twilio: Improving customer experience

Building communications software is a complex and costly process, requiring specialized servers, software, and IT personnel. For decades, these barriers have limited enterprises' ability to connect with customers.

Woman smiling at smartphone.

Image source: Getty Images.

Fortunately, Twilio solved this problem. By partnering with carriers across the world, Twilio built its own AI-powered Super Network, which connects global communications infrastructure (cell networks, public telephone networks) to the internet, turning the complexity of fiber, switching centers, and cell towers into simple software. Put another way, Twilio's platform makes it easy for enterprises to interact with consumers, whether it's through voice calls, text messages, video chat, or even Facebook Messenger. Ultimately, this helps Twilio's clients engage consumers more effectively and maintain their loyalty.

Despite a highly competitive landscape, Twilio's first-mover advantage has helped it stay ahead of its rivals. In fact, according to the IDC, Twilio's communications platform offers more functionality than any other solution on the market. That advantage has powered strong customer and revenue growth.

Metric

2017

Q3 2020

Change

Customers

48,979

208,000*

325%

Revenue

$399 million

$1.5 billion

287%

Data source: Twilio SEC Filings. Note: Q3 2020 customers include 84,000accounts from the SendGrid acquisition in Q1 2019.

In the coming years, brands will need to distinguish themselves through superior customer engagement. This should drive continued adoption of Twilio's platform, rewarding shareholders in the process.

2. Etsy: Supporting creative entrepreneurs

Etsy's marketplace allows sellers to monetize their creativity, and it helps buyers find unique, handcrafted items they can't find anywhere else -- anything from homemade jewelry and apparel to personalized artwork and home furnishings. As a first-mover in this niche market, Etsy has managed to stay ahead of the competition and build a thriving network of buyers and sellers.

Metric

2017

Q3 2020 (TTM)

Change

Active sellers

1.9 million

3.7 million

90%

Active buyers

33.4 million

69.6 million

109%

Revenue

$441.2 million

$1.4 billion

212%

Data source: Etsy SEC Filings. TTM: Trailing 12-months.

Etsy's robust ecosystem of buyers and sellers also creates a network effect. For example, each new seller that joins Etsy creates value for every buyer, and each new buyer creates value for every seller. This helps the company protect its business from rivals like Amazon Handmade.

Additionally, Etsy's management has made several smart moves that have helped scale the business quickly. For instance, in 2019, Etsy helped sellers offer free shipping on orders over $35, allowing them to meet consumer expectations set by retail giants like Amazon and Walmart. Likewise, Etsy completed a two-year migration to Alphabet's Google Cloud in 2019, which allowed the company to shift 15% of its engineers from maintenance tasks to customer experience, improving operational efficiency.

Investors should be encouraged by management's focus on growing the business and the company's strong competitive position. Going forward, as e-commerce continues to gain traction, Etsy is well positioned to gain market share (and reward shareholders).

3. Microsoft: Powering productivity

With a market cap of $1.7 trillion, it's fair to say Microsoft has achieved incredible scale. That advantage, paired with the company's many market-leading products -- Windows, Office, SharePoint, Teams, and various security solutions -- has helped Microsoft build a wide moat around its business, which has led to double-digit-percentage revenue growth in recent years.

Network of graphs and charts

Image source: Getty Images.

Despite the pandemic, Microsoft continues to fire on all cylinders, especially with commercial clients. Revenue from the company's productivity business rose 13% in the most recent quarter and 13% in fiscal 2020. These gains were driven by solid performance across all platforms -- Office 365, LinkedIn, and Dynamics 365 -- as more enterprises deployed digital solutions and more employees worked remotely.

Likewise, Microsoft Azure revenue jumped 50% in the most recent quarter and 56% in fiscal 2020. Microsoft currently ranks second behind Amazon Web Services in the cloud infrastructure market, but the company's focus on big data and AI have helped Azure achieve strong growth in recent years, which has translated into market share gains.

Market Share

Q3 2017

Q3 2018

Q3 2019

Q3 2020

Amazon Web Services

32%

32%

33%

32%

Microsoft Azure

14%

17%

17%

19%

Google Cloud

6%

8%

6%

7%

Data source: Canalys.

While Microsoft doesn't report specific dollar figures for Azure, Piper Sandler analyst Brent Bracelin estimates that Azure contributed 17% of total revenue in the most recent quarter, a huge increase from 4%three years ago. Moreover, he believes Azure will surpass Microsoft Office as the largest component of revenue by 2022.

Investors should pay attention to this in the coming quarters. Cloud computing is Microsoft's fastest-growing business, and it could create a windfall for shareholders over the next decade.

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Stocks Mentioned

Twilio Inc. Stock Quote
Twilio Inc.
TWLO
$101.82 (4.31%) $4.21
Microsoft Corporation Stock Quote
Microsoft Corporation
MSFT
$253.14 (-0.37%) $0.94
Etsy, Inc. Stock Quote
Etsy, Inc.
ETSY
$79.24 (0.51%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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