Growth stocks had a huge year in 2020 following the downturn that accompanied the start of the pandemic. In this digital era, new industry leaders are steadily developing more efficient ways of doing business and displacing previously entrenched incumbents. So while 2021 is not likely to feature a repeat of last year's surge in stock market value, a number of tech companies still have plenty of potential for years of growth. Three that are riding unstoppable digital trends are Zoom Video Communications (ZM 8.52%), NVIDIA (NVDA 3.04%), and Alibaba (BABA 3.56%).
1. Zooming into a new age for business meetings
Zoom was a high-growth company before COVID-19 struck, but the pandemic turned the cloud-based video communications company into an instant household name. For its fiscal 2021, which ended Jan. 31, 2021, revenue soared by 326% to $2.65 billion, and the company reported a 470% increase in business customers with at least 10 employees to 467,100.
But now, some are worried that Zoom's epic run will come to an end sooner than later. As the economy starts to reopen, many people are headed back to their workplaces. Travel is also showing early signs of a rebound. Nevertheless, I think video meetings are here to stay. Maintaining extra office space and traveling to meet others in person costs money -- and more importantly, extra time. Zoom unlocks new efficiencies for businesses, and in some cases is even replacing old telecom services in business settings. While it doesn't make sense for every business meeting, Zoom is a tool that will have staying power long after the pandemic comes to an end.
Zoom itself reinforced this idea. Its initial forecast for this fiscal year is for at least another 42% increase in sales. Management estimates adjusted income will rise by at least 13% as profit margins moderate, but a 30% adjusted net income margin is nothing to balk at. With over $4.2 billion in cash and equivalents and no debt as of the end of January, this is a formidable next-gen communications company.
Here's the real kicker: After shares took a tumble all the way down to where they were priced last autumn, Zoom is now valued as cheaply as it ever has been by some metrics. Shares trade for "only" 74 times trailing 12-month free cash flow. Sure, that's a steep premium that assumes this company will continue growing its bottom line at a double-digit-percentage pace for at least a few years, but cloud-based software services have the ability to scale up unlike any other business model around. Zoom looks like a solid buy again in my book.
2. NVIDIA is the future of computing
In the wake of the U.S.-China trade war, the pandemic, and a surge in demand for tech hardware, a global shortage of semiconductors has emerged as a real business challenge for 2021. Leading chip designer NVIDIA is benefiting from that, but there's more to the story here than manufacturing and supply chain constraints.
NVIDIA is an absolute powerhouse of innovation these days. Its roots are in hardware for high-end video game graphics (still its largest sales segment), but it's applying its know-how in that realm in a world of new uses. Turns out graphics processing units (GPUs) are also well-adapted to handling complex AI algorithms and are being added to data centers as computing accelerators. To help keep the steady stream of data needed to train AI systems flowing, the company acquired high-speed networking equipment maker Mellanox early last year. And now NVIDIA is looking to apply its AI research directly into everyday devices via its pending takeover of ARM Holdings.
New doors of opportunity are opening to NVIDIA as a result, including cloud software services built using its hardware, new 5G mobile network infrastructure applications, healthcare research and development, and autonomous vehicles. For its fiscal 2021, which ended Jan. 31, revenue increased 53% to $16.7 billion, while adjusted net income increased 75% to $6.28 billion. And the run higher isn't over yet. The company announced at its annual investor day that first-quarter fiscal 2022 sales were tracking above estimates -- previously pegged at $5.3 billion, or up 72% from a year ago.
Much like Zoom, NVIDIA is no cheap stock. Shares trade for 84 times trailing 12-month free cash flow. But given the company's massive growth in revenue and the huge semiconductor industry that it is still in the early stages of disrupting, this company looks like a long-term value for investors.
3. Alibaba: A high growth e-commerce stock at a value stock price
Zoom and NVIDIA carry sky-high valuations that price in many years of continued dominance, but the same can't be said for Alibaba. China's e-commerce leader has been hit with all sorts of headwinds as of late. Chinese regulators halted the IPO of its financial technology affiliate Ant Group, and are requiring it to restructure its operations. They've also hit Alibaba with a record $2.8 billion fine for anti-competitive activity.
But one famous investor by the name of Charlie Munger -- Warren Buffett's longtime business partner and vice-chair of Berkshire Hathaway -- thinks Alibaba is worth the currently known risks, and bought a sizable stake in the company. I agree. It's trading at 26 times trailing 12-month free cash flow, but it's expected to keep growing sales and earnings by at least 20% annually. Based on those figures, this fast-growing tech titan looks more like a value stock at the moment. Share prices are down over 20% from the all-time high they notched last summer.
Let's not forget that e-commerce is still a high-growth industry in China, where it's also benefiting from a fast-developing middle class. Alibaba is still ahead of the pack there, and is a leader in cloud computing and AI services in its domestic market as well. China's regulators may be tapping the brakes of their largest tech firm right now, but Alibaba's trajectory is still pointing upward -- and it should remain that way for the foreseeable future.
Plus, this is an incredibly deep-pocketed tech titan. Total cash and equivalents were $69.9 billion, plus another $65.2 billion in equity investments and other company ownership stakes at the end of 2020, offset by total debt of only $18.0 billion. The $2.8 billion fine it was hit with was a record levy in China, but it's quite manageable for Alibaba. Regulatory risks aside, this company is riding an unstoppable wave of e-commerce and tech development in China and the greater Asia Pacific region and looks like a solid long-term buy right now.