Has the pandemic-fueled growth stock rally ended for good? Although no one can perfectly predict the market, the signs are there. The rising 10-year yield curve has made investors jittery about the possibility of capital moving away from stocks to bonds, and of the Federal Reserve having to increase interest rates. For a long time, high-growth companies have depended on cheap capital to fund their expansions. Facing the possibility of almost zero-interest capital vanishing, many investors are shifting their focus to value stocks.
However, high-growth stocks such as Shopify (SHOP 0.92%), Advanced Micro Devices (AMD 0.43%), and Intuitive Surgical (ISRG -0.37%) have robust balance sheets and solid structural trends. I wouldn't run away from these picks so soon.
In 2020, Shopify accounted for 8.6% of the market share of U.S. retail e-commerce sales. Although far behind Amazon's leading market share of 39%, Shopify is still ahead of bigger players such as Walmart and eBay.
Shopify is not directly competing with any of these e-commerce players. Amazon and Walmart are focused on customers and on driving sales of their own products or third-party listings on their online marketplaces. Shopify's core focus is on providing merchants with tools to take their businesses online. The company also offers solutions to manage other aspects of retail business such as payments, capital, inventory and fulfillment, shipping, order management, marketing, and data analytics in a centralized fashion across all channels. Shopify's revenue stems from two sources: monthly tiered subscription payments from merchants and merchant payments for other customized solutions.
Pandemic-related e-commerce adoption and digitization of business have been the two most important growth drivers for Shopify in 2020. Although some amount of online spending could shift to brick-and-mortar channels after the pandemic, these trends will continue to transform the world for many years to come. Global retail e-commerce sales are estimated to grow almost 49% from $4.3 trillion in 2020 to $6.4 trillion in 2024.
Shopify had more than 1.7 million merchants on its platform at the end of 2020, a steep jump from its 1-million-strong merchant base at end of 2019. The rapidly expanding merchant base is attracting more developers and partners to Shopify's ecosystem, which in turn makes its platform sturdier, and thereby attracts even more merchants. This network effect has played a significant role in pushing up the company's revenue by 86% year over year to $2.9 billion and gross merchandise volume (GMV) by 96% year over year to $119.6 billion. The company also reported net income of $319.5 million in 2020, its first full year of profitability.
Shopify is trading at over 50 times sales, which is quite expensive. But because the company is helping so many businesses make a direct brand connection with their customers, I think it is still an attractive buy even at its current level. Shopify's retail strategy will assume a bigger role in future years, since Gen Z and millennials are increasingly opting for more personalized purchases. This is a multi-year opportunity, and can return rich returns to patient investors in the next decade.
2. Advanced Micro Devices
A darling of the stock market in 2020, AMD has mostly floundered in 2021. The culprits for the company's lackluster share price performance are losing some of its central processing unit (CPU) market share to Intel (INTC 1.30%) in the fourth quarter of 2020 and not being able to do much about it due to severe semiconductor shortages. While Intel designs and manufactures its chips, it is Taiwan Semiconductor Manufacturing (TSM 1.07%) that does most of the chip production work for AMD. With tight foundry capacity, AMD was unable to meet all demand in the fourth quarter.
However, these problems may be close to resolution. According to a Steam Hardware & Software survey, AMD's CPU market share for Microsoft's Windows operating systems increased from 25% to 28.97% from December 2020 to March 2021. At the same time, Intel's market share dropped from 75% to 71.02%. Although the survey only pertains to Steam gaming platform users, it highlights a trend in the overall CPU market, considering that Steam had 120 million active users globally in 2020.
AMD can also expect these production worries to ease, now that Taiwan Semiconductor Manufacturing has announced plans to invest $100 billion in capacity expansion over the next three years. With AMD being a prominent TSM client, these investments are bound to help the company.
Despite the many concerns, AMD's fiscal 2020 performance is quite encouraging, thanks to the company's focus on high-end CPUs and graphical processing units (GPUs), which are used extensively in the rapidly expanding gaming and data center markets. The company's revenue jumped 45% year over year, while net income more than doubled in 2020. Yet AMD is trading just over 10 times trailing-12-month sales, which is the lowest valuation for the company in the past 10 years. With a significant technological advantage over peers and gradually improving foundry capacity, AMD could prove to be an attractive investment for patient investors.
3. Intuitive Surgical
Leading robotic surgery player Intuitive Surgical's stock has gained just under 60% in the last year. This is especially commendable considering the pandemic caused hospitals to delay elective procedures, thereby reducing demand for the company's robotic da Vinci surgery system.
The company's fourth-quarter (ended Dec. 31, 2020) revenue grew by only 4% year over year, a significant decline from 22% year-over-year growth in the prior-year quarter. However, even the modest fourth-quarter top-line growth in such trying times is a testament to the success of the company's solid razor-and-blades business model.
Currently, there are 5,989 da Vinci systems installed across the world. So, although revenue from the sale of systems declined year over year by 12% to $1.2 billion, recurring revenue earned from the sale of instruments and accessories as well as service contracts increased by 6% year over year to $3.4 billion in 2020. Recurring revenue accounted for 77% of the company's total sales in 2020, which implies significant top-line visibility and low revenue volatility in coming years.
Intuitive Surgical is focused on expanding the type of procedures that can be performed with da Vinci as well as on expanding in international markets such as China, Taiwan, and India. The company also boasts the highest number of robotic surgery systems installed compared to the competition. Once surgeons and healthcare professionals are trained on one system, there are significant costs in terms of the learning curve and comfort level involved in switching to other systems. Each da Vinci system costs between $1 million and $2 million. Hence, it is not easy for hospitals to forgo such huge capital investments and switch to competing systems.
Trading over 21 times trailing-12-month sales, Intuitive Surgical is not cheap. However, considering that the company dominates the robot-assisted surgical systems market, expected to be worth $17.8 billion by 2027, there is much room for this healthcare stock to grow in coming years.