If you had walked into a Christmas cocktail party in late 2018 and said that stocks were going to have a record performance in the first half of 2019, a lot of people would’ve thought you were crazy. But, you also would’ve been right. We are now at the halfway mark of 2019, and the S&P 500 is up more than 17% year-to-date, marking the biggest year-to-date gain for the index through June since 1997, when stocks were up 21% year-to-date at this point in time.
In other words, the stock market is having its best year in over two decades.
As has been the theme of markets for the past decade, tech stocks are leading the 2019 rally. The Nasdaq-100 index is up more than 21% year-to-date, versus the 17% gain for the S&P 500. But, that 21% number doesn’t really do justice to the tech stocks which are truly leading the record 2019 rally.
Indeed, in that Nasdaq-100 index, there are eight stocks which are up more than 45% year-to-date. That means 8% of the Nasdaq-100 index has rallied more than 45% over the past six months.
That’s a big chunk making big gains. So which are those eight stocks, and will they keep rallying into the end of 2019? Let’s answer those questions and more by taking a deeper look at the market’s top tech stocks of 2019.
YTD Gain: 110%
The top tech stock from the Nasdaq-100 through the first half of 2019 is Latin American technology giant MercadoLibre (NASDAQ:MELI).
Often dubbed the eBay (NASDAQ:EBAY) of Latin America, MercadoLibre is Latin America’s largest online commerce and payments system with 280 million registered users across 18 countries. In 2018, MELI stock struggled as investors worried about forthcoming Amazon (NASDAQ:AMZN) competition in the company’s core Latin American markets. But, the stock has more than doubled in 2019 as the company has reported back-to-back quarters of robust gross merchandise value, buyer and revenue growth, largely putting those competition risks to rest. As those risks have been put to rest, MELI stock has flown higher.
Although the secular growth narrative supporting MercadoLibre is very healthy, the rally in MELI stock seems to have come too far, too fast, and MELI stock will likely trade lower into the end of 2019. The company has managed to grow at a healthy pace despite Amazon competition. But, Amazon is still aggressively expanding throughout Latin America, specifically in Brazil and Mexico, and that expansion will eventually catch up to MercadoLibre and weigh on the growth trajectory. At the same, MELI stock now trades at 13-times forward sales, which is a huge multiple for an online retail marketplace. Most online retail marketplace stocks trade around 3- to 9-times forward sales.
Thus, MELI is a richly valued stock that is staring at a potential slowing growth trajectory over the next several quarters as Amazon competition ramps. That isn’t a great recipe for success. Instead, it’s a recipe that implies that the best of the MELI stock rally may be over.
Cadence Design Systems (CDNS)
YTD Gain: 63%
The second-hottest tech stock in the Nasdaq-100 through the first half of 2019 has been electronics design giant Cadence Design Systems (NASDAQ:CDNS).
In simple terms, the secular bull thesis supporting Cadence Design Systems has gained traction, credence and visibility in 2019, and as it has, CDNS stock has rattled off a 60%-plus rally. This has all been powered by a back-to-back double-beat-and-raise earnings reports in the first half of 2019. Both reports comprised double-digit revenue growth, healthy margin expansion and strong profit growth. Analysts raised estimates, hiked price targets and sounded the bull horn after both of those reports. In response, investors celebrated and the stock rallied.
This big year-to-date rally in CDNS stock does not look sustainable into the end of the year for one simple reason: valuation. Over the past six months, beat-and-raise earnings reports have converged on a relatively discounted valuation to produce out-sized returns in the stock. Now, that relatively discounted valuation (25-times forward earnings, or below, for most of 2018) has been swapped out for a relatively premium valuation (32-times forward earnings today). Thus, even though the growth narrative will likely remain healthy, valuation friction will probably short-circuit the big 2019 rally in CDNS stock.
Advanced Micro Devices (AMD)
YTD Gain: 59%
Slotting in as the third-best performing tech stock in the Nasdaq-100 in 2019 is small-but-growing chip company Advanced Micro Devices (NASDAQ:AMD).
AMD was actually the S&P 500’s top stock in 2018, and has followed up that record performance with another near 60% year-to-date gain in 2019. The theme of this extended rally has remained consistent: market share expansion. Long story short, AMD is the David in the CPU and GPU worlds. Intel (NASDAQ:INTC) and Nvidia (NASDAQ:NVDA) are the Goliaths. In this David vs Goliath story, David is finally starting to land a few punches. Over the past 18 months, AMD has consistently and gradually gained market share on both Intel and Nvidia through better-than-peer chip product innovation. These market share gains have driven robust revenue growth, margin expansion and profit growth, which has led to a hockey stick rally in AMD stock.
Can this big rally persist? In the long run, yes. It does appear that AMD is positioned to become a permanently more important player in the huge CPU and GPU industries. But, in the near term, market share expansion upside is fully priced in. Prices above $30 require unnecessarily aggressive assumptions to be supported by long-term profit growth potential. As such, while AMD stock will maintain a long-term uptrend, the near-term outlook for this stock to head higher into the end of 2019 isn’t great.
YTD Gain: 50%
The fourth-hottest tech stock from the Nasdaq-100 through the first half of 2019 is semiconductor and electronics giant Synopsys (NASDAQ:SNPS).
The big 50% year-to-date gain in SNPS stock can be attributed to this company’s impressive resilience to a broader semiconductor and IT market slowdown in 2019. Growth across the semiconductor and IT markets has slowed meaningfully in 2019 amid escalating trade tensions and growing geopolitical uncertainty. Against that shaky backdrop, Snyopsys has reported not-so-shaky numbers. First-quarter numbers topped expectations and included an upside guide. Same was true for second-quarter numbers. This impressive operational resilience to broader IT market noise has propelled SNPS stock meaningfully higher in 2019.
At current levels, though, the stock seems unnecessarily stretched given its relatively muted growth profile. There are multiple secular growth tailwinds at play here through AI, automation, cloud and IoT. But, this company has been, still is, and continues to project as a mid-single digit revenue growth company with solid margin drivers. Ultimately, that implies roughly 10-15% profit growth per year over the next several years. That magnitude of profit growth on the stock’s average forward earnings multiple of 20 has historically produced strong returns in the stock.
But, SNPS stock today trades at nearly 30-times forward earnings. A 30-times forward multiple on 10-15% profit growth won’t work. As such, it looks like the best of the 2019 rally in SNPS stock has already happened.
Idexx Laboratories (IDXX)
YTD Gain: 48%
Rounding out the top five tech stocks of 2019, we have leading veterinary medical equipment company IDEXX Laboratories (NASDAQ:IDXX).
The big 48% year-to-date gain in IDXX stock can be attributed to the company’s continued operational momentum. In 2019, IDEXX has reported back-to-back strong earnings reports. The numbers in each report came in ahead of expectations. Both reports comprised 10%-plus organic sales growth and 20%-plus constant currency profit growth. Management also maintained a healthy full-year guide in each earnings report. They’ve continued to pound on the table about the long-term opportunity in pet care, too. Net net, IDXX stock has soared almost 50% higher in 2019.
The secular growth narrative supporting IDXX stock is really good. You have favorable demographic value and consumption trends that imply that the pet care industry will continue to grow at a robust rate over the next several years. That robust market growth should continue to underpin 10%-plus revenue growth at IDEXX. Lack of competition and value expansion will ultimately drive margins higher. That’s why management is targeting 15-20% EPS growth over the next five years. That seems entirely doable to me.
But, IDXX stock trades at nearly 60-times forward earnings. A 20% annualized EPS growth rate is more than fully priced in at 60-times forward earnings. Thus, while IDXX stock is the type of stock you want to own for the long haul, the current price tag is not the price at which you want to own this secular winner.
YTD Gain: 47%
The sixth-best performing tech stock in the Nasdaq-100 is innovative athletic apparel giant Lululemon (NASDAQ:LULU).
The story behind Lululemon’s big 47% year-to-date gain is pretty simple. Lululemon jumped onto the athletic apparel scene by becoming a high-quality producer of women’s yoga apparel. In that niche, Lululemon fostered strong brand equity and developed a reputation for second-to-none quality. The brand then leveraged that favorable equity and reputation to horizontally expand across the athletic apparel space. Today, Lululemon services the entire women’s athletic apparel market, parts of the men’s athletic apparel market and part of the footwear market. As Lululemon has horizontally expanded, the company’s revenues have run higher, while margins have remained robust due to the company’s strong brand equity and high-quality reputation. Net result? Profits have surged higher, and so has LULU stock.
LULU stock will continue to run higher in the long run. In the big picture, this is a relatively small player in the very big athletic apparel market. Lululemon’s revenues this year are projected at $3.8 billion. Skechers (NYSE:SKX) and Under Armour (NYSE:UAA) are $5 billion revenue companies. Adidas (OTCMKTS:ADDYY) is a $25 billion-plus revenue company. Nike (NYSE:NKE) will eclipse $40 billion in sales either this year or next year.
Thus, this robust growth narrative in Lululemon is still in its first few innings, meaning the big rally in LULU stock isn’t over just yet.
YTD Gain: 46%
The seventh hottest tech stock in the Nasdaq-100 through the first half of 2019 is American biotech giant Celgene (NASDAQ:CELG).
Unlike the other seven stocks on this list, the big year-to-date rally in CELG stock can be traced to M&A. In early 2019, Bristol-Myers Squibb (NYSE:BMY) announced its intention to acquire Celgene for $50 per share in cash, plus one share of BMY stock. At the time, the deal represented a $95 per share takeover value for Celgene. The stock rallied toward $90 in a hurry. It has since rallied close to $95 as shareholders of both companies have overwhelmingly approved the deal.
Further upside in CELG stock looks unlikely, mostly because all the acquisition upside has already been realized. The present proposed takeover value for CELG stock stands around $95. The current price tag on CELG stock is $93. Thus, if the deal does get through regulatory hurdles, there is some upside left here. But, not much.
YTD Gain: 45%
Last, but not least, on this list of top tech stocks of 2019 is social media giant Facebook (NASDAQ:FB).
After a brutal 2018 in which shares collapsed from $180 to $130, Facebook stock has staged an impressive turnaround in 2019 thanks to two things. First, almost everyone has moved past the 2018 data-privacy scandals which plagued the company. Users are using the company’s platforms as much as ever. Advertisers continue to pour money into the ecosystem. And Wall Street is back to its bullish stance. Second, Facebook has pivoted aggressively into commerce, which dramatically expands this company’s addressable market and lengthens the long-term growth runway.
Those same two catalysts will keep Facebook stock on a winning path for the rest of 2019. The advertising business will improve in the back-half of 2019 as user growth remains steady, ad dollars continue to flow into the digital channel and margins improve as big data-security investments scale back. Meanwhile, the commerce business should start to gain traction, and as it does, investors will become excited about the long-term revenue growth opportunity therein.
All in all, then, Facebook’s continued dominance in the digital ad world and recent pivot into commerce should keep FB stock on a winning path for the rest of the year.
As of this writing, Luke Lango was long EBAY, AMZN, INTC, NVDA, LULU, SKX, NKE and FB.