Fourth-quarter 2020 earnings are rolling in, and though the pandemic rages on, some companies are reporting stellar finishes to an otherwise forgettable year. Tech stocks -- the leaders of the digital economy that's emerging from the COVID-19 pandemic -- are the standouts here, and tech hardware, in particular, could be set for a banner year in 2021 as surging demand around the globe leads to supply shortfalls.
Three top names that had especially good fourth-quarter 2020 report cards -- and look like great buys for 2021 -- are Arista Networks (ANET +0.07%), Applied Materials (AMAT +5.98%), and Universal Display (OLED 1.19%).
1. Arista Networks: A coming data center upgrade cycle
As management anticipated a few months ago, Arista Networks returned to year-over-year growth mode in grand fashion at the end of 2020. Fourth-quarter revenue and adjusted earnings per share increased 17% and 9%, respectively, from a year ago as the company started to lap results from the data center construction slowdown that started in 2019.
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Full-year revenue and adjusted earnings per share finished down 4% and 7% from 2019, respectively, but the year's positive final quarter bodes well for this data center parts and software management leader. In fact, management said Q1 2021 sales should rally 22% from a year ago at the midpoint of guidance. And CEO Jayshree Ullal reiterated that the company has a multi-year run of expansion ahead based on Arista's open architecture hardware and cloud-based management tools.
A new data center upgrade cycle is getting underway, and Arista is poised to benefit in a big way. Additionally, many organizations are in dire need of IT infrastructure upgrades, and Arista has applied its portfolio of data center equipment and software to this arena as well. Called its "Cognitive Campus" portfolio, this is still a young business segment for Arista, but it picked up significant traction in its first year of existence. Paired with subscription software for cloud monitoring and security, led by the acquisitions of Awake Security and Big Switch last year, Arista has all the necessary tools to sustain its newfound growth trajectory.
As Arista laps depressed financials from 2020, a big recovery should be in store in the year ahead. The stock trades for 31 times trailing 12-month free cash flow, a reasonable price tag in my opinion given the expected recovery in business and the multi-year growth cycle that could lie ahead as organizations scramble to update their operations for the cloud era. Now a one-stop-shop of sorts solving problems from networking infrastructure to ongoing management, Arista looks like a top buy for 2021.
2. Applied Materials: Machines building more machines
Data centers supporting cloud computing aren't the only upgrade cycle that's underway. Semiconductors are also in high demand these days as high-end computing and data storage become must-haves for a myriad of new devices -- from laptops and PCs to phones with new 5G network capability to cars with complex safety and electric drivetrain technology. And applied Materials, which sells manufacturing equipment for the chipmakers, has long been a broad-based play on the semiconductor industry.
Applied started to post strong results last year with a new uptick in global chip demand, and its momentum is carrying over into the new year. The company's fiscal Q1 2021 (corresponding to the three months ended Jan. 31, 2021) revenue hit a new all-time record high of $5.16 billion, up 24% from a year ago. Adjusted earnings per share rose even more sharply by 42%. The outlook for Q2 (the quarter ending in April 2021) is even more dramatic: Revenue is expected to increase 36%, and adjusted earnings per share by 69%.
Digital memory chip fabrication (and engineering services and equipment supporting those operations) are driving Applied's financials higher in a big way, but the company is seeing strength elsewhere, too. High-end displays for devices are also on the rise (more on that below), as are sensors for cars and other industrial equipment. At the intersection of multiple tech developments, Applied is a solid place to invest to gain exposure to all of the above as a new digital era dawns.
The stock is up a whopping 80% in the last year, but still looks reasonably priced given the company's outlook. Shares trade for 28 times trailing 12-month free cash flow. If Applied's bottom line does indeed experience a massive double-digit-percentage lift as the company expects in the coming quarters, it's a fair price to pay for a top semiconductor engineering and manufacturing support company.
3. Universal Display: Out with the old, in with the new
Circling back around to high-end displays, OLED screens continue to supplant LED as the gold standard in consumer electronics. Premium smartphones have long boasted OLED screens, and a growing number of premium TVs are getting upgrades to OLED too. The same goes for tablets and laptops. Working behind the scenes to make it all possible is Universal Display, a key patent holder and materials seller in OLED screen manufacture.
Universal had a tough go of things last year. Smartphone sales fell off a cliff in the spring during the first pandemic lockdown, and consumer electronics purchases, in general, were muted for much of the year. Overall, the company's full-year 2020 revenue rose just 6%, and net income fell 4%. But the rebound in demand was solid in the final months of the year. Q4 revenue and net income increased 39% and 104%, respectively, from the same period in 2019.
Universal Display's management didn't indicate that a global hardware shortage was affecting its manufacturing partners, but there is a steadily rising demand for OLED in the global marketplace. Plus, the company will be lapping depressed financial results from the start of the pandemic. As a result, the company issued full-year 2021 guidance implying revenue will increase at least 24%. And given that the company reaches a more profitable scale with each additional sale, expect the bottom-line to rise at an even faster pace than it did in Q4.
Universal Display's stock is a pricey 83 times trailing 12-month free cash flow, but not unreasonable given the year-over-year financial dynamic that lies ahead. The company also has $730 million in cash and equivalents and zero debt, a considerable sum considering this is still a small-ish company with a market cap of just $10 billion. With OLED on the rise and expected to continue replacing LED for the foreseeable future, this is a promising business to stay invested in -- in 2021 and beyond.
