Technology stocks as a class were on fire last year -- as evidenced by the nearly 44% rise of the tech-heavy NASDAQ index. In recent weeks, though, many of 2020's highest-growth names have come under pressure as the U.S. economy starts to reopen. Investors are looking ahead, and "real economy" stocks are regaining favor over "digital world" brands.
At this point, some tech stocks do indeed deserve their price cuts, but for others, the growth story is far from finished. Three tech companies that these Fool.com contributors think can keep delivering strong growth even as the economy reopens are Veeva Systems (VEEV 2.53%), Fiverr International (FVRR 6.93%), and Taiwan Semiconductor (TSM 0.65%).
A life sciences tech company that will keep winning even after vaccine rollouts conclude
Nicholas Rossolillo (Veeva Systems): Veeva Systems stock price nearly doubled last year as biotech and pharmaceutical companies scrambled to develop treatments and vaccines for COVID-19. The company just reported its full-year results, revealing revenue grew 33% in 2020 to $1.47 billion and free cash flow increased 25% to $542 million. Not bad, considering this software firm is still investing heavily in its growth as it helps life sciences, cosmetics, and consumer goods companies update their operations to a more modern digital format.
This was more than a pandemic-fueled growth story, though. While Veeva did get a small boost to its upward trajectory last year, it was a fast-expanding firm before the COVID-19 crisis, and it will remain one afterward. Case in point: Management's initial outlook for the next 12 months forecasts another 20% increase in revenue (to $1.76 billion at the midpoint), with adjusted profit margins remaining at nearly 40% of sales.
Granted, given the more tepid outlook (at least compared to 2020), a pullback was overdue. Shares are now down by nearly 20% from the all-time high they reached last month. But there's still a lot going in Veeva's favor. For example, its customer count grew by 132 last year to a grand total of 993. Given the massive scope of its addressable markets, there's no shortage of companies it could sign new deals with.
Plus, its customers have a habit of spending more with Veeva over time, in part because the company is constantly expanding the functionality of its platform -- from data management to clinical trial compliance to customer relationship management (which is built on the salesforce.com platform). Subscription revenue retention was 124% last year, meaning that on average, existing Veeva users spent 24% more with the company in 2020 than they did in 2019. With another pretty good run forecast ahead, this stock is still one of my favorite ways to play the biotech and pharmaceutical industry.
Finding jobs for freelancers, and freelancers for jobs
Anders Bylund (Fiverr International): Freelance services marketplace operator Fiverr International sure got a business boost from the coronavirus lockdowns of 2020. Lots of people found themselves with too much time on their hands, often due to job losses or reductions in hours at their primary jobs. Under those circumstances, selling their talents through online freelancer portals like Fiverr simply made sense.
At the same time, there was no lack of entrepreneurial people itching to use the enforced downtime of 2020 to start or grow their own businesses -- and freelancers could help them. All things considered, it should come as no surprise that Fiverr's revenue and free cash flow growth increased sharply last year.
The fact that that pandemic provided a lift to Fiverr doesn't mean its growth story will be a flash in the pan, though. The company is using its dramatically larger revenue streams, cash flows, and customer lists to build a business for the ages. CEO Micha Kaufman has huge ambitions and a clear plan for achieving his lofty goals.
"Essentially, the go-to-market strategy that we had at the beginning was that we would tackle this market by beginning at the very bottom of it with the micro services for micro businesses. And over time, we would go upmarket and offer more sophisticated services for more sophisticated types of customers," Kaufman said at a virtual conference last month. "And the fast-forward of this model to today is a very fast-growing company that offers services between the tens of dollars and the tens of thousands of dollars for customers that are solopreneurs up to the largest enterprises of the world."
Fiverr is dealing with larger and larger customers these days, and it recently introduced a business-to-business version of its freelancer task-matching platform. The more money Fiverr makes, the more money it will invest in marketing, sales, new services, and a more robust back-end system. These initiatives will then generate more cash, which can be reinvested again. That's the industry-standard definition of a high-growth business model, and Fiverr is executing it like a champion.
We're looking at the early stages of Fiverr's business growth here. Kaufmann sees an addressable market worth more than $100 billion a year in North America alone, and the company already operates around the world. With annual revenues of just $190 million in 2020, Fiverr has barely scratched the surface of its enormous and growing target market.
This looks like a great time to buy Fiverr shares, too. The stock price has retreated by 33% from the all-time high it hit three weeks ago. That's a generous discount in my book.
This chip supplier has a dividend yield equal to the 10-year treasury, plus booming growth prospects
Billy Duberstein (Taiwan Semiconductor Manufacturing): One of the sectors that held up in the early stages of the pandemic, then soared toward year-end, was the semiconductor sector. Semiconductors underpin all of the big tech trends today: AI, cloud computing, 5G, the Internet of Things, and more. And yet the companies that produce them are often valued much more cheaply than large internet platforms and software-as-a-service stocks due to their cyclical characteristics.
So with high-growth stocks now taking a beating while more cyclical sectors head higher, semiconductor stocks could still outperform. And beyond those factors, we are currently in the midst of a big semiconductor shortage due to supply bottlenecks caused by the pandemic, coupled with soaring demand for tech products.
The leader in global semiconductor manufacturing is Taiwan Semiconductor Manufacturing, which has leaped ahead of all competitors in terms of leading-edge capability. Top chip designers, from Qualcomm (NASDAQ: QCOM) to Nvidia (NASDAQ: NVDA) to Apple (NASDAQ: AAPL), all use Taiwan Semi to produce their latest and greatest chips. That 5-nanometer chip that's powering the 5G iPhone 12? Only possible courtesy of Taiwan Semiconductor Manufacturing's capabilities.
Not only are some of the world's greatest companies clamoring for Taiwan Semiconductor Manufacturing's services, but so are entire countries. Last June, the United States agreed to help subsidize its $12 billion project in Arizona just so that the U.S. could have some of this leading-edge manufacturing capacity within its borders. Fast-forward to last week, and the company just announced it would be tripling the size of that Arizona plant due to overwhelming demand. The Biden administration also just asked Congress for $37 billion in new funding for domestic chip manufacturing, some of which will likely go to TSMC.
Last year, Taiwan Semiconductor Manufacturing's revenue grew by 25.2% to $45.5 billion, and net income surged a whopping 50% to $17.6 billion. But don't expect its growth to slow down anytime soon. Management forecast between $25 billion and $28 billion in capital spending in 2021, up by about 50% to 60% from last year's $17.2 billion. This company wouldn't spend that much money unless it's seeing the requisite demand to absorb its new production, and even after that announcement, it appears the global semiconductor shortage has gotten worse.
Taiwan Semiconductor Manufacturing's stock price has pulled back along with share prices across the tech sector as of late, but after an impressive 120% run upward over the past year, that should not be entirely unexpected. At current share prices, its dividend yields 1.42%, which is about even with the yield of the 10-year U.S. Treasury. But given this company's near-assured growth over the next decade, its stock is a much better bet.