A little over a year ago, I penned the investing acronym STARS, which included a collection of five big-growth technology companies that represented the future of the internet landscape.
The logic behind coming up with STARS was simple. The investment world’s favorite technology stock acronym — FANG, or Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — was becoming less relevant in an increasingly complex internet landscape. That is, while FANG established the internet economic foundation, they no longer represented the cutting edge of innovation in the internet economy.
Who does? STARS. In simple terms, STARS represent a class of market-leading internet service stocks that build upon, add complexity to and enhance the internet economic foundation that FANG established.
My suggestion in late 2018 was simple. Buy these STARS stocks. They represent the future of the internet, and as such, are some of the best stocks to buy and own for the long haul.
That strategy has worked out in 2019. Year-to-date, each STARS stock is up more than 20%, with three 100%-plus gainers.
Will this group keep charging higher in 2020? Yes. But some of them have come so far, so fast, that there will be turbulence over the next few months.
Without further ado, then, let’s take a deeper look at each on these strong STARS stocks that are changing the future.
STARS Stocks to Buy: Shopify (SHOP)
Year-to-Date Gain: 143%
In the big picture, e-commerce solutions provider Shopify (NYSE:SHOP) remains a core part of the STARS group, and will leverage direct and decentralized retail tailwinds to become a significant infrastructure player in the global retail marketplace at scale. SHOP stock will power higher in the long run. But on the heels of a 143% year-to-date rally, SHOP stock needs to take a breather over the next few months for valuation purposes.
Shopify provides solutions and tools which help small-to-medium-sized retailers and merchants sell online, and they are the best in the game at doing this. As such, the company finds itself in the overlap of two mega-trends. The first is a big pivot towards direct retail, wherein consumers are increasingly buying online and directly from a merchant’s website, so merchants of all shapes and sizes are being forced to up their direct retail game. The second is a big move towards decentralized retail, wherein the internet is enabling and empowering a new generation of start-up retail shops that are holding their own against Big Retail. That is leading to this proliferation of small-to-medium-sized retailers.
As a result, the retail world is pivoting towards a direct, decentralized model wherein you have a ton of smaller merchants running their own e-commerce platforms, powered by Shopify. Thus, as the world continues to evolve its internet retail model over the next few years, Shopify will become an increasingly irreplaceable part of the global retail ecosystem.
In the long run, then, SHOP stock will power meaningfully higher. But, near-term upside seems limited, thanks to what has become an aggressively stretched valuation.
STARS Stocks to Buy: The Trade Desk (TTD)
Year-to-Date Gain: 102%
Programmatic advertising platform The Trade Desk (NASDAQ:TTD) made the STARS group because this company represents the future of the advertising world. Long term, TTD stock will head significantly higher. But up at $234 and on the heels of a more than 100% year-to-date rally, TTD stock looks maxed out in the near-term.
The long-term bull thesis on The Trade Desk remains robust. This company employs programmatic advertising solutions, which are essentially are series of self-service, cloud-based, data-driven and automated services which help advertisers create, manage and optimize their ad campaigns across various channels (display, video, audio, social, etc). These programmatic advertising solutions represent the future of advertising. Quite simply, they take what was largely a static “guess and check” process performed by humans and turn it into a dynamic scientific process performed by computers and informed by data.
That’s why The Trade Desk has been consistently growing revenues at a 40%-plus rate. Yet, gross ad spend through The Trade Desk measures just a fraction of the global digital ad spend pie. As such, there’s plenty of room left for growth here, as programmatic advertising deepens its reach into the digital ad world.
Long term, The Trade Desk projects as a big revenue grower, with sizable 30%-plus EBITDA margins. Ultimately, that combination will power TTD stock higher. But, those gains will likely be capped in the near-term. The valuation on TTD stock is simply too rich today. Until the valuation comes down, shares could struggle for further gains.
STARS Stocks to Buy: Adobe (ADBE)
Year-to-Date Gain: 33%
The largest company in the STARS group is creative solutions giant Adobe (NASDAQ:ADBE). It also happens to be the least-volatile stock on this list, as well as the cheapest stock. Yet, the long-term growth narrative here is just as compelling as it is for the rest. This combination ultimately makes ADBE stock look like a great buy, even up 33% year-to-date.
We all know Adobe as the unrivaled giant in the creative solutions game. That is, if someone is going to professionally create or edit a photo or video, they are likely to use an Adobe product to do that. This is a solid growth business. Gross margins are super high. The revenue streams are annually recurring through subscriptions. There are growth drivers, given that consumers today are increasingly interacting with visual products, and so have a greater need to professionally create/edit photos and videos.
But, the exciting part of Adobe’s business is on the enterprise side of things. That is, because consumers are increasingly interacting with visual products today, enterprises are increasingly communicating with consumers in that way. So enterprises are being forced to up their visual communications and are turning Adobe to help them do that.
Through Adobe’s Experience Cloud, brands are leveraging Adobe’s visual expertise to deliver best-in-class customer experiences.
This visual mega-trend pivot is still in its early stages. So is the Experience Cloud’s growth narrative. That means Adobe’s revenue and profit growth trajectories will stay big for a lot longer. At 31-times forward earnings, ADBE stock trades at a reasonable multiple for that big growth. As such, buying Adobe stock here seems like a solid idea.
STARS Stocks to Buy: Roku (ROKU)
Year-to-Date Gain: 368%
Streaming device maker Roku (NASDAQ:ROKU) has an incredibly bright future as the “cable box” of the streaming TV world, wherein the company will generate tons of high-margin TV ad revenue and ROKU stock will power meaningfully higher. But a lot of that bright future is already priced into shares today. On the heels of a 368% year-to-date rally, ROKU stock needs to take a breather.
Consumers and media companies alike are pivoting in bulk from linear to streaming TV channel. As they do, the streaming TV landscape is becoming increasingly complex and crowded, with a ton of consumers and a ton of streaming services — not too unlike the linear TV world, where there are a ton of pay-TV subs and a ton of channels.
Much like the cable box has done in the linear TV world, some platform needs to connect all those subscribers to all those streaming services. Roku is that platform.
Of note, they do so from a content-neutral standpoint. Roku doesn’t favor any one streaming service over the others. Also of note, Roku is the biggest player in this market, and size matters here because consumers like consistency and media companies need distribution (which Roku provides better than anyone else).
In other words, Roku is powered by a virtuous growth cycle which ensures that it will maintain favorable competitive positioning in the secular growth streaming TV world. All that growth will ultimately power ROKU stock higher in the long run.
Having said that, the valuation has sprinted ahead of the fundamentals in the near-term. Over the next few months, the fundamentals will be playing catch-up, and as they do, shares won’t grind much higher.
STARS Stocks to Buy: Square (SQ)
Year-to-Date Gain: 19%
The last of the STARS stocks is payments processor Square (NYSE:SQ). SQ stock has been the worst performer in the group in 2019. Yet, the fundamentals here remain robust and are improving as we head into 2020. This combination of relative underperformance and strong and improving fundamentals makes SQ stock look like a great buy here and now.
There are five reasons why I like SQ stock at the current moment. First, the macro environment is improving, as global capital spending and economic trends are rebounding. At the same time, labor markets remain healthy, interest rates remain low and inflation remains checked. All together, that makes for a great consumer spending backdrop, and Square performs well when consumers are spending big.
Second, against this improving consumer spending backdrop, Square’s growth rates are stabilizing. That is, after several quarters of decelerating payment volume growth, the payment volume growth rate stabilized sequentially last quarter. Given the improving backdrop, this stabilization could turn into acceleration in 2020, and that transition could light a fire under SQ stock.
Third, the company’s relatively new Cash App continues to grow at a rapid pace, and 2020 could be a big year for Cash App in terms of it going from relatively small, to a significant revenue driver. Fourth, relative under-performance in SQ stock over the past year makes the stock a compelling “buy the dip” candidate if the fundamentals do improve. Fifth, SQ stock is as attractively valued as it has been in a few years.
The bottom line here is that SQ stock looks really good heading into 2020, and that 2019 under-performance could turn into 2020 out-performance.
As of this writing, Luke Lango was long FB, NFLX, SHOP, ADBE, and SQ.