Based on the performance of the Technology SPDR (ETF) (NYSEARCA:XLK), tech stocks have had a good year. The ETF has logged a gain of nearly 15%. However, plenty of tech stocks still have not enjoyed the bull move and many have experienced implosions.
This is normal fare for the high-risk technology sector, but some important trends should help juice up returns for years to come.
For example, mergers and acquisitions are likely to remain strong as mega-tech operators like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Cisco Systems, Inc. (NASDAQ:CSCO) look for ways to pump up growth. Besides, with the expected tax reforms of Donald Trump, these companies will likely be able to take advantage of their massive cash deposits in offshore accounts.
At the same time, there are important megatrends in technology that should drive growth. Just some include cloud computing, AI (Artificial Intelligence) and Virtual Reality (VR).
With that as a backdrop, let’s take a look at seven tech stocks that stand out.
Tech Stocks to Buy: Coupa Software Inc (COUP)
Back in early October, Coupa Software Inc (NASDAQ:COUP) pulled off a red-hot IPO. But the gains have fizzled, with the shares off about 23%.
Yet this could be a nice opportunity. Coupa operates a cloud platform that helps companies better manage their spending. It currently has more than 460 customers and a network of over 2 million suppliers across the globe. So far, COUP has provided more than $10 billion in savings.
Growth has certainly been solid as well. In the latest quarter, revenues spiked 55% to $35.4 million. Granted, the company is still losing money, but the margins have been steadily improving.
By being in the cloud, Coupa has been able to leverage mobile apps and powerful analytics. Yet perhaps the biggest advantage is the “network effects.” According to the company’s S-1: “As more businesses subscribe to our platform, the collective spend under management on our platform grows. Greater aggregate spend under management on our platform attracts more suppliers, which in turn attracts more businesses that want to take advantage of the goods and services available through our platform, thereby creating powerful network effects.”
Yes, it’s a virtuous cycle. More importantly, it’s the kind of advantage that can provide a strong moat for COUP, which is always critical in the hyper-competitive tech industry.
Tech Stocks to Buy: Benefitfocus Inc (BNFT)
When it comes to technology, the benefits administration industry needs lots of improvement. According to a survey from the Employee Benefit Research Institute, only 49% of employees are fully satisfied with their plans.
This is certainly good news for Benefitfocus Inc (NASDAQ:BNFT), which has a top-notch cloud platform. The company’s strategy is to make benefits administration as easy as working with something like Amazon.com, Inc. (NASDAQ:AMZN). In other words, it is intuitive for employees to shop for, enroll in and manage benefits.
In terms of the growth of the business, BNFT has been consistent. The revenues have increased more than 30% for the last three years and the company recently turned EBITDA positive. There are also over 800 large employer customers and more than 50 insurance carriers on the platform, with the revenue retention rate at 95%.
For the most part, the growth should continue for some time. As should be no surprise, there are major changes in the benefits market, especially with healthcare. Perhaps the most impactful is the move to high-deductible plans, which means that employees need to understand their options and costs. This requires the kinds of functions that are at the core of BNFT.
Tech Stocks to Buy: New Relic Inc (NEWR)
According to a report from IDC, at least 80% of enterprises will implement multi-cloud strategies during the next few years. In fact, by 2018 about half of all IT expenditures will be cloud related.
To do this requires sophisticated tools and infrastructure systems. And this is the sweet spot of New Relic Inc (NYSE:NEWR). The company has apps that help boost the performance of cloud systems but also provide ongoing analytics and tracking.
Growth has been particularly strong: For the most recent quarter, NEWR reported a 48% spike in revenues to $63.4 million. The company has also made strides in getting closer to profitability.
But the real key is that New Relic has been getting traction with larger customers — which is a big-time sign of the strategic importance of the technology. In the latest quarter, the company had its second highest number of six-figure transactions. Also, 20 that spend more than $1 million.
Although, as NEWR CEO Lew Cirnesaid said on the earnings call: “[I]t is important to stress that none of these [large customers] are close to being fully penetrated.”
Tech Stocks to Buy: Mobileye NV (MBLY)
For this year, the shares of Mobileye NV (NYSE:MBLY) have been off course with the loss at about 17%.
But this looks like a pretty good entry point for investors. The company continues to grow at a rapid clip, with revenues jumping 34.4% to $94.9 million in the most recent quarter. The cash flows have also remained particularly strong, coming to $38.6 million. There is roughly $585 million in the bank.
Of course, MBLY is positioned nicely for one of the hottest trends in tech: autonomous vehicles. Since the late 1990s, the company has been building technologies for vision, mapping and machine learning. As validation of all this, Mobileye has been able to strike major partnership deals with companies like Delphi Automotive PLC (NYSE:DLPH), Intel Corporation (NASDAQ:INTC) and BMW AG (OTCMKTS:BMWYY).
However, the end-game for MBLY is likely to be an acquisition. After all, the space has seen heavy deal making. Just some of the transactions include Samsung’s (OTCMKTS:SSNLF) $8 billion purchase of Harman International Industries Inc (NYSE:HAR) and Qualcomm, Inc.’s (NASDAQ:QCOM) $39 billion deal for NXP Semiconductors NV (NASDAQ:NXPI).
Tech Stocks to Buy: Atlassian Corporation PLC (TEAM)
Atlassian Corporation PLC (NASDAQ:TEAM) is not the typical Silicon Valley startup — it was launched in Australia and the founders did not even take venture capital. Instead, they used their credit cards to fund the startup.
It was a good move. Now TEAM is one of the top players in the fast-growing market for collaboration tools. In fiscal Q1, revenues jumped by 34% to $101.8 million and free cash flows came to a hefty $28.5 million. Overall, there is $754.3 million in the bank.
This is one of the few hot tech companies that shows there can be strong growth and profitability.
A key to the success of Atlassian has been its strong focus on innovation. Keep in mind that its portfolio includes nine different products. As a result, TEAM has had little trouble racking up new customers. In Q1, they came to over 4,700, bringing the overall total to more than 65,000.
But all this really scratches the surface of the opportunity. Consider that there are over 800 million knowledge workers worldwide that could benefit from Atlassian’s offerings.
Tech Stocks to Buy: Zendesk Inc (ZEN)
Zendesk Inc (NYSE:ZEN) may not be well known. But you have certainly heard of many of their customers, such as Uber. They use ZEN to leverage the cloud to provide top-notch customer service.
So it should be no surprise that the company has been able to produce consistent growth on the top-line. In the most recent quarter, revenues shot up by 45% to $80.7 million and the customer count hit over 87,000.
But ZEN is still in the early stages. The fact is that the company has been investing in next-generation technologies like AI and machine learning. With this, customers will be able to provide even more personalized experiences.
Yet Zendesk would make a compelling buyout opportunity. And there is no shortage of potential suitors, such as Salesforce.com, Inc. (NYSE:CRM), MSFT or Oracle Corporation (NYSE:ORCL).
Tech Stocks to Buy: PayPal Holdings Inc (PYPL)
PayPal Holdings Inc (NASDAQ:PYPL) may be 18 years old, but the company continues to look more like a startup. During Q3, the company reported an 18% increase in revenues to $2.7 billion and operating cash flows came to a hefty $801 million. The active customer count hit 192 million, up 11% on a year-over-year basis.
All very good, right? Sure. But Wall Street hasn’t been to excited. Since late October, the PYPL shares have lost about 10%.
But this means that investors have a chance to participate in the mobile payments revolution for a reasonable valuation. Besides the core PayPal service, the company also has other strong businesses like Xoom (which allows for international remittances for families and friends) and Braintree (provides third parties the ability to handle transactions).
Although, the real gem appears to be Venmo, which is a mobile app that is a must-have for millennials. During the latest quarter, the transaction volume soared by 131% to $4.9 billion.
For the most part, this holiday season has shown the strategic importance of mobile payments. Consider that Black Friday was the first time that mobile purchases exceeded $1 billion, according to research from Adobe Systems Incorporated (NASDAQ:ADBE).
As former InvestorPlace contributor Dan Burrows recently noted: “PYPL stock currently changes hands at 23 times forward earnings. That’s a rather slim premium for a company with a projected compound annual growth rate of 17% for the next half decade. That’s especially true in a bull market, where multiple expansion is the order of the day.”
Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
