In many ways, 2021 has been a year like no other. The pandemic has dragged on, introducing frightening new variants, resulting in many false starts and stops for the underlying economy. Even as the benchmark S&P 500 has gained a remarkable 25% so far this year (as of this writing), numerous subsectors of the market haven't been as fortunate. Many high-flying growth stocks have taken it on the chin, shedding a significant portion of their value, representing significant opportunities as we head into 2022.
With that as a backdrop, let's look at three companies that have all the ingredients for continued success: leadership in their respective fields, significant secular tailwinds, and large, untapped addressable markets that could make them among the most successful stocks of the coming year.
1. Nvidia: Fueling gaming, data centers, and the metaverse
When it comes to graphics processing, no company holds a candle to Nvidia (NVDA 5.12%). It not only pioneered the graphics processing unit (GPU) as we know it today, but also has long been the industry leader.
Nvidia boasts a massive 83% share of the discrete desktop GPU market. Its cutting-edge processors are indispensable for serious gamers everywhere, leaving its rivals to fight over the scraps. This led to 77% growth for its gaming segment during the first nine months of this year, which represents the lion's share of its overall sales.
The company's addressable market has expanded significantly in recent years with the advent of cloud computing and artificial intelligence (AI). Nvidia's lightning-fast GPUs have become the go-to for every major cloud operator and are unrivaled at training and running AI algorithms. As a result, its data center revenue has surged 53% so far this year.
Nvidia generated revenue of $16.7 billion last year, which pales in comparison to the as-yet untapped opportunity. Management estimates that its addressable market will total $250 billion by 2023, which helps illustrate the magnitude of the opportunity that remains.
Lastly, its processors are at the heart of many of the technologies that will power the metaverse, adding a $10 billion incremental opportunity over the coming five years.
2. Roku: The future will be streamed
Over the past several years, Roku (ROKU 0.60%) has become the leading platform for accessing streaming services, beating Amazon's Fire TV at its own game. Yet the company has gone beyond its namesake dongles and set-top boxes, creating a state-of-the-art smart TV operating system -- the Roku OS -- which it licenses to a growing number of connected-TV manufacturers.
As a result, more than 56 million households use Roku's platform to access their favorite streaming services -- and therein lies the opportunity. The company gets a cut of every new subscriber who joins a paid streaming service from the Roku home page. Additionally, it charges each of the ad-supported streaming channels a flat rate of 30% of the advertising inventory streamed on its platform, which it then uses for targeted advertising. Roku also pockets all the ad revenue from its homegrown option, The Roku Channel.
This revenue, along with licensing from the Roku OS, makes up the company's platform segment -- and business is booming. For the first nine months of this year, platform revenue grew 99% compared to the prior-year period.
At the same time, sales from its player segment declined, but Roku sells these devices at or near cost to bring viewers into its growing ecosystem. More viewers attract more channels and ad revenue, while a greater selection of programming attracts more viewers, fueling a virtuous cycle.
As a result, ad executives are beginning to move broadcast advertising budgets to streaming, since they get more bang for their buck. A study last year found that while 29% of television viewing occurs on streaming services, just 3% of TV ad budgets are spent there. As these ad dollars find their way to streaming, Roku is uniquely positioned to reap the windfall.
Then, there's Roku's massive addressable market, which is expected to top $769 billion by 2024. Given it generated just $1.78 billion in revenue last year, the size of the untapped opportunity is clear.
One final note: Fair-weather investors became concerned about the slowing of account growth and streaming hours in Roku's most recent quarter. This coincided, however, with the loosening of pandemic restrictions and summer vacations, so it isn't too surprising. Once investors realize the error of their ways, Roku stock will likely move higher.
Forewarned is forearmed.
3. The Trade Desk: Enabling the next generation of digital advertising
When it comes to programmatic advertising, The Trade Desk (TTD 4.54%) is in a league of its own. The company pioneered a state-of-the-art system that uses high-speed computers and sophisticated algorithms to automate the buying of digital ads in real time. The platform can evaluate 12 million ad impressions and quadrillions of permutations each second, ensuring ads reach their target market.
Additionally, by working with the world's largest ad agencies -- rather than against them -- The Trade Desk has established a broad coalition of companies that have adopted its Unified ID 2.0, which is largely viewed as the replacement for ad-tracking cookies, which are swiftly being shown the door.
Once they become a customer, marketers tend to stick around, as evidenced by The Trade Desk's customer retention rate, which has remained steadfastly above 95% for the past seven years.
Digital advertising is expected to grow at 12% this year, twice the ad industry growth rate. Programmatic advertising, The Trade Desk's bread and butter, is expected to climb 29%. The Trade Desk's revenue growth rate leaves them both of those industry-wide figures in the dust, with sales soaring 55% during the first nine months of this year. That illustrates that the company is stealing market share from the incumbents. Additionally, unlike many high-flying stocks, The Trade Desk is solidly profitable, with net income that grew 41%.
The Trade Desk generated revenue of $836 million last year, which is a drop in the ocean of its massive opportunity. The global ad industry is expected to hit $763 billion this year, climbing to more than $1 trillion by 2026.
The icing on the cake
If the aforementioned criteria -- market leadership, secular tailwinds, and large addressable markets -- weren't enough, there's another reason to act now. The recent rotation out of technology stocks has made each of these companies cheaper on a relative basis. At the time of this writing, Nvidia, The Trade Desk, and Roku are currently selling for 12%, 16%, and 53% off their recent highs, respectively.
That's not all. Over the past three years, each of these stocks has absolutely crushed the broader market, a result of stellar execution and the aforementioned advantages. This increases the likelihood that they will continue to outperform over the long term.
And isn't that what every investor is looking for, after all?