Tech stocks took a hit earlier this year as the market moved out of some of the most popular names into more consumer cyclical stocks. The Nasdaq 100 Technology Sector index that rose 456% in 2020 is up only 13% this year, and all of those gains have been since mid-May.
With the number of vaccinations rising and people returning to their offices, corporate spending on technology is rising. While computers and communication equipment will certainly get their fair share of dollars, software could be one of the biggest winners, with analysts at Forrester Research expecting to see it gain the bulk of that growth in 2021 and 2022. Not all the software companies out there will gain, but the following three tech stocks could generate fabulous returns for investors.
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1. Adobe Systems
Adobe Systems (ADBE +2.70%) will garner a lot of attention from tech system spenders if only because it is one of the largest enterprise software firms globally. Arguably best known for its portable document format (or PDF) as well as its suite of photo editing titles (primarily Photoshop), Adobe is actually so much more than that.
The company divides its operations into two broad, strategic segments -- digital media and digital experience -- that cover a range of media, communication, and cloud-based opportunities. It has registered nearly 22% compound annual revenue growth for the past four years, and revenue is up another 24% over the first three-quarters of 2021.
Wall Street, though, sees that growth slowing to 15% annually over the next five years with earnings expanding just 11% annually. Coupled with the CEO selling off a large tranche of shares, that could be why Adobe's stock has done little more than track the tech stock index, and shares have lost 15% of their value over the past month. Still, as investing legend Peter Lynch has noted, executives can sell off shares for any reason -- they have college educations to pay for, a new hot tub to install, etc. -- but they only buy for one reason, so stock sales are really background noise without more information.
Analysts look like they might be underestimating Adobe's potential and its ability to operate at such high-profit margins. During the last five years, Adobe's gross margins have averaged over 86% annually, but on a trailing 12-month basis are closer to 90%. Over the past decade, the software leader has provided a 36% total return to investors, far more than the industry and more than twice as great as the tech market trend index.
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2. Snowflake
Cloud-based data analytics firm Snowflake (SNOW 4.15%) has performed worse than Adobe and even the tech index, with its stock only 10% higher in 2021. That's good news for investors because it ought to make it flurry for them. Snowflake started strong out of the gate following its September 2020 IPO, but in December a lockup on stock options expired just as the market rotated away from high-flying tech stocks. From peak to trough, shares lost more than half their value and have had to climb their way out of a deep hole.
Yet Snowflake's analytics platform is right in the wheelhouse of where Forrester Research sees some of the greatest spending happening. Companies need more power to analyze the ever-increasing amounts of data they are generating and collecting and to be able to do it no matter where the data is stored. While discrete platforms located either in-house or in the cloud will see an uptick in corporate tech expenditures, it will be those like Snowflake's, which are agnostic to the data's location, that will garner the greatest share.
Although analysts may worry that rivals like Alphabet's BigQuery might become a formidable competitor, Snowflake's advantage is that it is cloud-native and platform-neutral. Snowflake doesn't care where you're operating, even if it's a hybrid situation, or if your business is using Amazon's S3, Microsoft's Azure, or even Google Cloud. You'll be able to access and analyze your data.
Wall Street is expecting an avalanche of returns from Snowflake. Analysts forecast a tenfold increase in revenue over the next five years, growing from $592 million last year to over $5.6 billion by fiscal 2026.
3. Upstart
Unlike either Adobe or Snowflake, Upstart Holdings (UPST +2.13%) hasn't felt much of the tech wreck the rest of the industry did as its stock is up almost 1,000% since its IPO last December and is 685% higher in 2021 alone. There's good reason for that.
Upstart is looking to transform the online loan application process by introducing artificial intelligence, machine learning, and deep learning into the process. By using over 1,000 different data points instead of the relative handful used by the traditional loan industry, it's making the process accessible to more people, and doing so with a lower risk of default for lenders. Upstart partners with banks to originate the loans and then sells those loans to institutional investors, or the originating bank might instead choose to retain the loan on its balance sheet.
It expects revenue to triple this year to $750 million (it was up over 1,000% last quarter), and Wall Street is looking for revenue to grow by a compound annual rate of over 81% for the next three years. More importantly, it has become profitable, generating net income of $37 million last quarter compared to a $6.2 million loss a year ago, and analysts forecast full-year net profits of $165 million by 2023.
