While the first batches of the vaccine rolled out this week, investors are optimistic about returning to normal next year. That means a growing economy and gains in cyclical stocks that underperformed during the pandemic.
But what happens to tech stocks next year? Will they underperform after a strong year of gains? The Invesco QQQ ETF (QQQ), an index made up of the 100 largest non-financial companies listed on the Nasdaq Composite index, is up 46% year to date. That's quite a gain, especially compared to the S&P 500's gain of only 14.7%.
It was clear from April that the major beneficiaries of the pandemic were going to be tech stocks that had the infrastructure in place to facilitate online learning, business, and commerce. Then came news of positive results in vaccine trials in November, and a rotation into more cyclical stocks began. While I believe that the rotation will continue into next year, I'm not counting out tech stocks. I believe people are overestimating the amount of time it will take for things to get back to the "old normal," even after a large percentage of the population is vaccinated.
In addition, sky-high valuations of many tech stocks are likely to continue, especially with a near-zero interest rate. In fact, following its latest policy meeting, the Fed announced today it would keep the short-term interest rate near zero. Plus, any comparison to the dot-com bubble is off-base, as many of those stocks had zero revenue, which can't be said for many of the big-name technology stocks today. While valuations for some recent IPOs with no profits are concerning, established technology companies still have room to gain. This is true for ServiceNow, Inc. (NOW), Autodesk, Inc. (ADSK), NXP Semiconductors N.V. (NXPI), and Skyworks Solutions, Inc. (SWKS).
ServiceNow, Inc. (NOW)
NOW provides software solutions to structure and automate various business processes via a SaaS delivery model. The cloud-based IT services company primarily focuses on the IT function for enterprise customers. NOW made headlines last week after it acquired artificial intelligence (AI) start-up Element AI. This should boost NOW's AI capabilities. Element AI was founded to help non-tech companies build AI services.
NOW has seen strong growth in subscription revenues as businesses and government agencies continue to bring their infrastructure to the cloud. The company is targeting public and large private companies, and as it gains more Fortune 500 clientele, revenue should continue to increase. In addition, its expansion into non-IT service management markets such as human resources and security solutions bodes well.
The company had a strong third quarter with adjusted earnings increasing 22.2% year over and revenue jumping 28%. NOW also raised its raised 2020 guidance for subscription revenues, billings, and operating margin. Its future looks bright due to the secular trends of digital transformation and cloud migration.
The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" in Trade Grade and Buy & Hold Grade, and a "B" for Peer Grade and Industry Rank. Those are the four components that make up our POWR Ratings. The stock is also ranked #1 in the Software – Business industry.
Autodesk, Inc. (ADSK)
ADSK is an application software company that serves industries in architecture, engineering and construction, product design and manufacturing, and media and entertainment. Its high-margin software enables the design, modeling, and rendering needs of these industries. The company essentially offers a service that designers and architects depend on.
The company recently posted strong financial results for the third quarter. Earnings jumped 33.3% year over year due to growth in subscription plan revenues, gross margin expansion, and lower operating expenses Revenues rose by 13%. ADSK saw rapid adoption of its BIM 360 products and its maintenance to subscription program.
A cloud tailwind should drive up demand for the company's cloud-based products, mobile solution, and design suites. Analysts expect sales growth of 14.23% next year, and earnings growth of 30.2% next year. The company is highly profitable with a return on equity of 618.6% and an ROIC of 26.8%.
The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" for Trade Grade and Buy & Hold Grade, and a "B" for Peer Grade and Industry Rank. While NOW was ranked #1 in the Software – Business industry, ADSK is a close second.
NXP Semiconductors N.V. (NXPI)
NXPI is a leading supplier of high-performance mixed-signal products. The company has a significant market share in the automotive market, where it supplies microcontrollers and analog chips into automotive clusters, powertrains, infotainment systems, and radars. NXPI also serves industrial and Internet of Things (IoT), mobile, and communications infrastructure.
The stock has certainly performed well this year, up 145.8 % since March 18th. This is due to a strong rebound in demand across all of its end markets. Its automotive business accounts for nearly half the company's revenues. NXPI has been investing in automotive as electronic content in automobiles is on the rise.
The company is also seeing growth in the industrial and IoT businesses due to the replacement of traditional mechanical equipment by smart and connected electronic equipment. In its communications business, NXP should see additional revenue due to rising 5G network deployments. Analysts expect earnings to grow by 33.5% next year.
The stock is rated a "Strong Buy" in our POWR Ratings system. It holds a grade of "A" in three out of the four POWR components, including Trade Grade, Buy & Hold Grade, and Industry Rank. It is also the #10 ranked stock in the Semiconductor & Wireless Chip industry.
Skyworks Solutions, Inc. (SWKS)
SWKS produces semiconductors for wireless handsets and other devices that are used to enable wireless connectivity. The company's customers are mainly large smartphone manufacturers, but it also has a growing presence in other applications such as wireless routers, medical devices, and automobiles. Its stock jumped over 4% yesterday after two analysts raised their price targets.
Morgan Stanley increased its price target to $155, and Goldman Sachs increased its price target to $171 and maintained a "Buy" rating on the stocks. Investors can take these upgrades as a vote of confidence in SWKS as it is currently trading around $147. The company has benefited from an accelerated 5G deployment and increasing demand for 5G handsets. Its chips were used by companies such as Samsung, VIVO, and Xiaomi.
The company's products are also being used for remote work, online learning, and video streaming due to the pandemic's stay-at-home protocols. SWKS reported its latest financial results last month, and earnings rose 21.7% year over year and revenue by 13.6%. The company also provided strong guidance for the first quarter of fiscal 2021. Analysts expect earnings to grow 26.12%.
SWKS has a strong balance sheet with a current ratio of 5.2 and is highly profitable, with a net margin of 24.3%. The stock is rated a "Buy" in our POWR Ratings system. It holds a grade of "A" in Trade Grade and Industry Rank, and a "B" for Buy & Hold Grade.
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NOW shares . Year-to-date, NOW has gained 93.04%, versus a 16.66% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.4 of the Best Tech Stocks to Buy For 2021: ServiceNow, AutoDesk, NXP Semiconductors, and Skyworks Solutions appeared first on StockNews.com