There’s a fuzzy line around what exactly constitutes tech stocks. It’s easy to imagine technology as having to focus on software, the internet, or advanced technologies such as genetic research or space exploration. The sort of thing that appears in science fiction movies.
In truth, however, the technology sector can be a lot broader depending on how you look at it. Many companies coming out of older economy industries have used technology to garner a decisive advantage. Or they started with a unique piece of technology to disrupt the existing companies in their traditional field.
Streaming would be a classic example of this in practice. At the time, it wasn’t clear if streaming was just a new form of a media company or totally a technology play through and through. Today, the lines have blurred even more. That’s just one example of the sorts of tech-ish companies and sectors have offered investors tremendous returns from redefining adjacent industries.
Here are seven tech stocks that represent technology-adjacent companies delivering compelling returns for investors:
- Netflix (NASDAQ:NFLX)
- Spotify (NYSE:SPOT)
- Domino’s Pizza (NYSE:DPZ)
- Nasdaq (NASDAQ:NDAQ)
- Roper Technologies (NYSE:ROP)
- Visa (NYSE:V)
- Chewy (NYSE:CHWY)
Tech Stocks: Netflix (NFLX)
Netflix might just be the perfect example of a “tech-ish” company. Is it a media company or is a technology operation? Arguably, it is both. In the beginning, it started off by disrupting traditional video rental stores such as Hollywood Video and Blockbuster. Netflix had some technology at the time, such as its DVD request queue, but it was primarily a logistics operation then.
When it pivoted to streaming, it more openly became a technology firm. Netflix would now live or die by the quality of its software and related features such as its recommendation engine. Even so, the media business never exited the equation.
Over the years, Netflix moved back toward the offline economy, as it invested billions of dollars into its original content initiatives. By making its own movies and TV shows, Netflix took the media fight right to the old giants such as Walt Disney (NYSE:DIS).
As for Netflix today, is it primarily a technology company that produces movies, or is it a media company with a great set of software to deliver that content to subscribers? Regardless of the answer, NFLX stock has been a tremendous success for its loyal investors.
Spotify has enjoyed a similar trajectory in music has Netflix has for video. When Spotify entered the industry in 2006, recorded music was in collapse. Industry revenues were plummeting as consumers abandoned CDs to pirate music instead. Digital downloads never really managed to take off either.
Spotify’s music streaming platform was the thing that finally turned the industry around. As more people signed up (and in particular subscribed to the premium option) global music revenues recovered. Was it Spotify’s reimagining of the traditional music market that made it a success? Or was it the company’s intuitive cross-platform ecosystem for finding, managing, and reproducing songs?
And now, Spotify has begun its own journey into original content. Spotify is investing hundreds of millions of dollars in podcasts so that it can own much of the content on its platform as well. In five or 10 years, it could well be a dominant music and media production and licensing company, in addition to maintaining its industry-leading streaming software platform.
Domino’s Pizza (DPZ)
This one may cause most people to think I’ve lost it. How is a pizza company a technology company? However, it actually became a famous example of the overlap in industries thanks to CNBC pundit Jim Cramer.
Cramer said that “Domino’s is a fantastic technology company,” back in 2017. He said this highlighting Domino’s at the time industry-leading app and built-in integration with cloud software providers such as Splunk (NASDAQ:SPLK). By perfecting the ordering process, Domino’s made it seamless to get pizza from an app years before the competition.
That advantage became a dominant feature in 2020 when the pandemic struck. Suddenly, digital order channels became the whole game and Domino’s had already won that playing field years before. Domino’s heavy investments in what might have seemed like a frivolous app many years ago gave it a long runway to secure dominant market share in its industry and deliver mouth-watering returns in DPZ stock over the past decade.
Tech Stocks: Nasdaq (NDAQ)
Nasdaq is a quintessential example of a technology company in a traditional industry. Brokerages and clearing houses have been around for centuries. However, the Nasdaq helped redefine the business by being one of the first large computer-driven exchanges.
Most stock and bond exchanges are primarily run by computer-trading now. So is Nasdaq a traditional company once again? Not so fast. Nasdaq has invested heavily in software and service offerings for its clients.
In particular, these are tied to selling data to clients so that they can engage in algo-driven and high-frequency trading. According to the sector classifications, Nasdaq is usually listed as a financial company. But it is a tech-forward markets company that is now developing a second core business in selling software and services around big data. The line between being a financial exchange and a tech platform is murkier than ever, and the Nasdaq is leading the way forward.
Roper Technologies (ROP)
Look up Roper Technologies on investing websites and screeners and you’ll usually see it shown as an industrial company. And sure, many years ago, Roper was primarily an industrial company that made physical equipment such as pumps for heavy-duty uses.
Over the past 20 years, however, it has quietly evolved from being an industrial firm itself to primarily selling software to industrial companies. To that end, the company officially changed its name from Roper Industries to Roper Technologies in 2015. Today, the company sells a wide range of software for applications such as insurance, power plant management, graphic design, construction, and more.
This sort of diversified software platform represents a highly-attractive business model. ROP stock owners get exposure to a basket of industrial-flavored software businesses. Shares trade at just 30x forward earnings, which is a bargain in today’s market conditions.
Visa is another company that is labeled as a financial. In practice, however, it looks as much like a technology firm as a financial services company.
A big part of that comes from how exactly Visa makes money. Visa doesn’t take credit risk on its transactions. Rather, the partner bank is responsible for all of that. Visa’s responsibility is for maintaining the integrity and speed of its global payments network. It earns a small fee on a gargantuan number of transactions, rather than trying to earn a larger fee but taking on credit risk.
Because Visa is a volume-based business that doesn’t take financial risk, it looks a lot more like a software company in practice. And it’s started to act like one as well. For one thing, Visa launched Visa Ventures back in 2011, and which has now invested in at least 60 different startups in payments companies, financial software firms, and so on. Funding the start-ups is a great way for Visa to stay ahead of disruption.
Visa has also launched projects related to cryptocurrency and NFTs, among other emerging fields. The company obviously isn’t going anywhere in terms of its core credit card technology, but it is actively pursuing any and all potential disruptions to make sure it has a lion’s share of the global payments business for many years to come.
Tech Stocks: Chewy (CHWY)
A lot of e-commerce retail companies bridge both technology and retail. On the one hand, pet food and pet care products retailer Chewy looks a lot like PetSmart. It’s obviously taking place online, but Chewy is still selling most of the same products that you’d find in a big box retailer that specializes in cat and dog needs.
However, Chewy built its business from a technology-first angle. It has always prioritized subscriptions and collecting tons of user data and preferences. The longer a customer is with Chewy, the more it knows about that customers’ likely future needs. After using a site like Chewy for many years, it can become difficult for them to every defect to another vendor. That’s becoming increasingly true as Chewy looks to integrate more features such as pet telehealth offerings into its website.
On the other hand, Chewy earns very low gross margins that are decidedly unlike most tech companies. That’s understandable. It’s hard to earn fat margins selling a bulky product such as kitty litter. And it perfectly sums up the tech-adjacent company conundrum. Chewy isn’t quite a pure tech company, but it’s certainly more than just another mass market retailer.
On the date of publication, Ian Bezek held a long position in SPOT, NDAQ, ROP, and V stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.