Despite the recent sell-off, tech stocks, in general, have been great long-term investments in recent years. According to S&P Global Market Intelligence, the information technology sector has returned 26.5% per year over the last five years, substantially outperforming the 14% annualized return of the broader S&P 500.
Investors looking to pick up a few shares of high-quality tech companies should consider Arista Networks (ANET +5.85%), Fastly (FSLY +0.10%), and PayPal Holdings (PYPL 1.34%). Here's why.
1. Arista Networks: Connecting the cloud
Today, many consumer applications and websites are delivered from cloud data centers -- think Amazon, Facebook, and Microsoft. That means millions of users may be shopping on Amazon or scrolling through Instagram at the same time. To support all of that traffic, these enterprises need data centers capable of moving large amounts of data quickly and efficiently.
Image source: Getty Images
Arista Networks makes this possible. As a pioneer in software-driven cloud networking, the company's hardware and software solutions allow clients to deploy and manage networks across data centers and enterprise campus environments.
One of Arista's key innovations is the extensible operating system (EOS), which runs across its entire portfolio of switching and routing hardware. Compared to legacy vendors that use multiple operating systems, Arista's EOS reduces complexity, which translates into lower IT costs for clients. But EOS is also designed to be highly reliable and programmable, which means clients can easily visualize the network, automate network tasks, and integrate third-party applications to achieve customization.
The bottom line is this: Compared to legacy solutions, Arista's platform reduces the cost of network ownership. And that has translated into impressive financial performance. In fact, Arista's revenue and free cash flow growth have far outpaced those of rivals like Cisco and Juniper Networks.
ANET Revenue (TTM) data by YCharts
Despite this past success, Arista's management sees a $33 billion addressable market by 2025. That leaves plenty of room for the company to grow, which means there is plenty of upside here for investors.
2. Fastly: Enabling edge computing
Fastly's edge cloud platform enables its clients to deliver content and process data at the edge of the internet (meaning close to end users). This is important for several reasons: First, by moving content delivery and data processing to the edge, Fastly's platform makes the internet faster and more reliable. That translates into a better user experience.
Second, because Fastly's servers are located between its customers and end users, Fastly's platform is ideally positioned to provide security. When a user requests a website powered by Fastly, the request goes to Fastly's servers, not the website's origin servers -- meaning Fastly can act as a shield to protect its clients. Last year, Fastly acquired Signal Sciences to boost its security offering.
Third, Fastly helps its clients reduce infrastructure and operational costs. Because clients use Fastly's servers to store content and process data, they need fewer on-premise servers in their own data centers. That cuts infrastructure expenses, but it also decreases the need for IT personnel to maintain that on-site hardware, which cuts payroll expenses.
Fastly is much smaller than the market-leader Akamai, but its top line is growing much more quickly, an indication that Fastly is gaining ground.
|
Revenue |
2018 |
2020 |
CAGR |
|---|---|---|---|
|
Akamai |
$2.7 billion |
$3.2 billion |
9% |
|
Fastly |
$144.6 million |
$290.9 million |
42% |
Data source: Akamai and Fastly SEC Filings. CAGR: compound annual growth rate.
In 2020, Fastly's client base jumped 20% to reach 2,084 -- a big acceleration from the 10% growth posted in 2019. More importantly, Fastly kept 99% of its customers last year, and its net retention rate rose from 132% to 137%. That means Fastly's customers are spending more. And with the stock down roughly 50% from its 52-week high, this looks like a great time to add a few shares.
3. PayPal: Powering digital payments
PayPal's network connects 29 million merchants with nearly 350 million consumers, and it facilitated $936 billion in payment volume in 2020.
Image source: Getty Images.
PayPal has benefited greatly from the uptick in e-commerce and digital payments, two trends that became even more pronounced throughout the pandemic. In the last year alone, PayPal launched more new products and services than any other year in the company's history.
For instance, PayPal users can now buy, sell, and hold cryptocurrency directly through the mobile app, and the company plans to extend this option to Venmo users in the coming months.
PayPal also acquired the remaining 30% of GoPay last year, making it the first and only foreign firm to operate a China-based payments company. Despite big competition from Ant Group's Alipay and Tencent's WeChat Pay, this is still a big opportunity for the company, as China is the largest payment market in the world.
However, despite excellent performance in 2020, this year could be even better for PayPal. During the company's most recent earnings call, CEO Dan Schulman said, "This year, our digital wallet will change more than it has ever changed before, significantly increasing its functionality." He elaborated on this idea, indicating that the company plans to introduce new budget and savings tools, investment alternatives, and bill pay options. PayPal also plans to more fully integrate Honey's shopping tools into its digital wallets, allowing consumers to use the shopping rewards platform both in stores and online.
As a final thought, PayPal's growing network and trusted brand name give it an advantage over rivals. And those advantages should help the company sustain growth for many years to come.
