Technology is always changing, and the stock market's performance over the past decade has shown that tech stocks are must-own for almost any kind of investing style.
So-called FAAMNG stocks have been big winners and now make up the five most valuable companies in the United States. The tech sector's share of the overall stock market, meanwhile, is only going to grow in the coming years as technology more deeply penetrates business and everyday life.
With that in mind, we asked three of our contributors for their picks for stocks that are determining the way technology evolves. Keep reading to see why Shopify (SHOP +1.26%), Tesla (TSLA +2.89%), and Facebook (FB +2.36%) all made the list.
Image source: Getty Images.
Shop till you drop
Eric Volkman (Shopify): The coronavirus pandemic has forced many consumers to replace in-person shopping with the online variety. The ease and convenience becomes a hard habit to break. This, combined with other positive trends, is why e-commerce is in front of a long-tail growth story where it'll get much, much bigger.
As it does, one obvious beneficiary will be leading online retailing platform operator Shopify. The company is the one-stop shop (sorry) for a great many businesses building out an online presence, and it draws revenue by charging either flat subscription fees or (in the case of its Shopify Plus service aimed at larger enterprises) by a percentage of the client's sales.
It's a clean, straightforward and effective way of getting a piece of the e-commerce windfall. As a result, Shopify -- hardly a young company -- is continuing to grow like gangbusters.
In fact, Shopify's 86% year-over-year revenue growth in 2020 to $2.9 billion was its fastest revenue growth over the past four years. Many hot new companies in the tech industry can crank out double-digit growth in their early years, but this typically slows before long. It's a rare and special operator that can actually increase that rate, and do so after it's been on the scene for some time.
As for profitability, Shopify aped other tech up-and-comers by landing in the red on the bottom line for years. The costs for developing its offerings were considerable, after all. That changed in Q4 2019, when it eked out a roughly $800,000 net profit. Since then, those numbers have improved dramatically -- in its two most recently reported quarters it netted $879 million and nearly $1.26 billion, respectively.
Skeptics are quick to point out that Shopify stock has a sky-high valuation, thanks in no small measure to its monster popularity with investors during the pandemic. Its trailing 12-month price-to-sales ratio has climbed to nearly 51, and its forward price-to-earnings ratio is an astounding 244. By comparison, fellow e-commerce favorite Amazon boasts a P/S of 3.9 and a P/E of 58.
Yet Amazon, while indisputably a retail juggernaut, is a more mature business than Shopify. And the latter company is still in the middle of a gold rush that's only going to get more crowded. In many respects, Shopify isn't merely going to be a beneficiary of the future of e-commerce -- it is the future of e-commerce.
Writing the future of the automobile
Trevor Jennewine (Tesla): Tesla may not be the first company that comes to mind when you think about tech stocks, but maybe it should be. Recently, CEO Elon Musk expressed his belief that, over the long term, people would think of Tesla as an artificial-intelligence and robotics company, not just an electric-vehicle (EV) manufacturer.
To that point, since October 2016, all Tesla vehicles have shipped with autopilot hardware, involving eight external cameras, 12 ultrasonic sensors, and an onboard supercomputer. Today, with over 1 million cars on the road, the company has collected over 3 billion miles' worth of real-world driving data, far more than any other automaker. That gives Tesla a significant advantage in the race to build a fully autonomous EV.
In 2019, the company reinforced that advantage with the launch of Autopilot Hardware 3.0, featuring an upgraded version of the in-car supercomputer. At the time, Musk called it "[objectively] the best chip in the world," and a report from Nikkei came to the same conclusion, stating that Tesla's technology was six years ahead of its rivals.
More recently, Musk made a bold announcement at Tesla's Battery Day event, saying the company would produce a fully autonomous $25,000 EV within the next three years. You read that correctly -- Tesla plans to have an affordable, self-driving electric car in the near term.
If the company realizes that goal, it could radically change Tesla's business model. Rather than compete on low-margin vehicle sales, Tesla could license its self-driving platform to other automakers, transitioning into the higher-margin software industry. The company could also launch an autonomous-ride-hailing network, a market that Cathie Wood's Ark Invest values at $1.2 trillion by 2030. And given Tesla's advantage -- better tech and more data -- the company could capture a good chunk of that figure.
As a final thought, Tesla stock currently trades at an outrageous 19 times sales, while Toyota trades even with sales. But a decade from now, if Tesla does indeed shift gears and disrupt the mobility industry, that number may not seem so absurd in hindsight. That's why now looks like a good time to pick up a few shares of this tech stock.
Meet me in the metaverse
Jeremy Bowman (Facebook): Traditionally, Facebook hasn't been known as a pioneer of new technology. The company dominates social media and makes its money from advertising, and while social media as a concept is new, enabled by the internet, selling advertising next to content is a centuries-old business model.
However, Facebook's next phase could look a lot different. The company is investing heavily in its virtual-reality platform, Oculus, and similar projects at Facebook Reality Labs, its research division devoted to augmented and virtual reality. On Facebook's second-quarter earnings report, CEO Mark Zuckerberg introduced investors to the term "metaverse," which he explained on the earnings call was a virtual environment where people can be present with one another inside digital spaces. Zuckerberg described it as a place where anyone can hang out with friends, work, create, or play games.
So far, Oculus is only generating a small fraction of Facebook's total revenue, but it could get a lot bigger as virtual and augmented reality (AR and VR) go mainstream. Zuckerberg has predicted that VR would be the next big computing platform, noting that historically computing platforms have shifted approximately every 15 years, from mainframes, to PCs, to the internet, to mobile. Considering the iPhone was first introduced in 2007, the transition to VR should be emerging in the next few years, based on that pattern.
Monetization of the metaverse will come later, but it's easy to see how a new experience VR and AR lends to itself to a wide range of possibilities, including advertising, subscription content, an Apple-like app store, gaming, and others. Zuckerberg is only 37 years old and could very well be running Facebook in 2050, giving him plenty of time to execute on his vision. Wherever the future of technology goes, it's a good bet that he will be there.
