Tech stocks ruled this past decade, with some stock surging to trillion-dollar valuations. The next technology wave of artificial intelligence (AI), cloud computing, virtual reality, and autonomous driving could probably rule the next decade. Warren Buffett doesn’t typically invest in technology, but he made his most successful bet on Apple Inc. (AAPL) as a consumer technology company.
Behind AAPL’s $2 trillion Valuation
AAPL is undoubtedly a good stock. The tech juggernaut was the first stock to reach a $1 trillion market cap on August 2nd 2018. And in exactly two years, on August 4th, the stock doubled to the $2 trillion market cap. AAPL earned its first trillion-dollar valuation from its premium consumer products like iPhone, MacBook, iMac, and Apple Watch.
In this decade, it is the most valuable brand and has been enjoying customer loyalty. However, its premium smartphones are gradually losing their charm. Therefore, AAPL shifted to monetize its existing user base by making its iOS platform sticky with various services.
AAPL unlocked the next trillion-dollar valuation from its App Store services like Apple Pay, Apple TV, and Apple Music, and the pandemic just accelerated the journey to $2 trillion. On August 4, AAPL's stock crossed the $467.77 mark after it reported robust third-quarter earnings and a four for one stock split, which came into effect on August 31st. Since the split, the stock declined 7.5%.
This next trillion-dollar valuation shows AAPL moving from hardware to a software company. While AAPL is a good stock, its App Store has come under siege for anti-competitive practices.
Third-party apps are getting frustrated with AAPL’s 30% commission on in-app transactions and its restraints on outside payment methods. Fortnite creator Epic Games has filed a lawsuit against the Apple App Store, and Spotify (SPOT) has created an anti-Apple consortium. Despite these concerns, AAPL stock has surged 63% year-to-date.
How does AAPL stack up for the POWR Ratings?
A for Trade Grade
B for Buy & Hold Grade
B for Industry Rank
B for overall POWR Rating
The stock is also ranked #4 in the 30-stock Technology - Hardware industry.
There are better stocks than Apple
While AAPL will continue to grow, its pace of growth is slowing. Its annual revenue growth rate slowed from 45% in fiscal 2012 to 5.5% in fiscal 2020, with two years of negative growth. Wall Street analysts expect the iPhone 12 Supercycle to boost AAPL’s revenue by 14.5% in fiscal 2021 and then slow to 4.9% in fiscal 2022.
On the other hand, Roku Inc (ROKU), Logitech International Sa (LOGI), and GoPro Inc (GPRO) are growing at a faster pace with the stay-at-home trend acting as a catalyst. These three stocks fell between 6% and 12% last week on the COVID-19 vaccine euphoria. That provides a good opportunity to buy these stocks as they have strong growth potential.
Roku Inc (ROKU)
ROKU was among the key beneficiaries of the pandemic-driven lockdown as people swooned to home entertainment. It is also one of the biggest beneficiaries of the cord-cutters trend where people are canceling their costly cable connections and buying subscriptions for internet video services like Netflix (NFLX) and Amazon (AMZN) Prime Video. But consumers are now shifting to free internet video networks as their entertainment budgets are tight. While this is not good news for NFLX, ROKU is in a better position because of its multi-revenue business model.
ROKU started by selling hardware devices like dongle and set-top-box and licensing its platform to smart TV manufacturers. Today, it is a leader in the over-the-top (OTT) streaming devices market. You can watch paid, ad-free video-on-demand as well as free, ad-supported internet video on the ROKU platform. ROKU charges a 20%-30% commission on subscriptions from streaming networks. The more streaming services, the higher ROKU’s average revenue per user (ARPU).
Last year, the streaming wars heated up as tech, entertainment, and communication companies launched their own streaming services. ROKU’s ARPU surged 29% year-over-year in 2019, driving its stock up 337%.
But now, ROKU is generating a larger portion of its revenue from advertising. It is trying to become the Google (GOOGL) or Facebook (FB) of TV advertising. ROKU is leveraging its large subscriber base to collect real-time user data and help marketers target a user base that will have a higher conversion rate. In the third quarter, its revenue surged 73% year-over-year to $451.7 million, of which 71% came from advertising and 29% from hardware units.
ROKU’s growth will continue in the coming years as it expands internationally. Analysts expect its revenue to grow 53% this year and 37.6% next year. This growth will drive its stock price. Hence, ROKU is rated a “Buy” in the POWR Ratings. It holds an “A” in Trade Grade and a a “B” in Buy & Hold Grade, Peer Grade, and Industry Rank. It is also the #8 ranked stock in the Technology - Hardware industry.
Logitech International Sa (LOGI)
Another consumer-favorite tech company, LOGI got a lot of attention in the pandemic as people shifted to video calling and working and learning from home. It saw huge demand for its higher quality and affordable computer peripherals like mouse, keyboards, webcams, and headsets.
Some of its popular products were PC webcams, video collaboration products, and tablet accessories, as Zoom (ZM) call became the new norm. LOGI reported a monster fiscal 2021 second-quarter where its revenue crossed $1 billion for the first time. Revenue rose 75%, and net income surged 266% on a year-over-year basis.
While LOGI is a major beneficiary of the work-from-home trend, it is also at the center of the esports revolution. As Sony (SNE) and Microsoft (MSFT) launched their next-generation game consoles, gamers might want to upgrade their headsets and other accessories to up the game field. LOGI’s products could be the perfect holiday gifts as they will fit in many people’s budgets.
At a time when many companies are refraining from providing earnings guidance due to COVID-19 uncertainty, LOGI is raising its guidance. It has increased its full-year guidance from 10%-13% revenue growth to 35%-40%. This shows the company’s confidence in consumer demand. Analysts expect its revenue to surge 38% this year and remain flat next year.
Even with single-digit revenue growth of 9%, LOGI’s stock surged 53% last year. So far this year, the stock has risen 76% and has the potential to grow even further. LOGI is rated a “Buy” in our POWR Rating system. It has an “A” for Trade Grade and a “B” for Buy & Hold Grade, Peer Grade, and Industry Rank. In the Technology – Hardware industry, it is ranked #9.
GoPro Inc (GPRO)
While ROKU and LOGI are already riding the bulls of the stay-at-home culture, GPRO is picking up the trick of the trade. To give you a little background, the action camera maker launched its initial public offering in 2014 and suddenly jumped to a $12 billion valuation with a price of $85. It could not sustain this value and came crashing down to a $1.08 billion valuation, and $7.14 stock price.
The stock is currently trading at 0.94 times its sales per share, with its 2019 sales at $1.2 billion. The valuation looks attractive, but it only makes sense to buy the stock if it has growth potential. This year, GPRO unveiled a new strategy of selling directly to consumers through its website. It also launched the GoPro Plus subscription platform to help consumers make the most of their GoPro gears.
GPRO subscribers can upload their videos and photos from their camera on the cloud and access it on any device. Moreover, subscribers can get discounts on other GPRO products, a camera replacement option, and much more. This strategy is working. Its paid subscribers rose 35% sequentially to 500,000 in the third quarter. It expects its subscriber count to grow to 700,000 by the end of this year, and 2 million by the end of next year.
In the last two quarters, GPRO’s revenue grew both sequentially and year-over-year. Third-quarter revenue increased 114% year-over-year to $28.0.5 million. Analysts expect its revenue to fall 24% this year, but surge 18% next year as its subscription and direct-to-consumer strategy drives demand.
GPRO’s growth story has just begun, with its stock up 64.5% year-to-date. As revenue surges, the stock price should also surge. Hence, GPRO is rated a “Buy” in our POWR Rating system. It also has an “A” for Trade Grade, and a “B” for Industry Rank. In the Technology – Hardware industry, it is ranked #11.
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AAPL shares were trading at $120.71 per share on Monday morning, up $1.45 (+1.22%). Year-to-date, AAPL has gained 65.62%, versus a 13.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Puja Tayal
Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles.Forget Apple, Buy These 3 Tech Stocks Instead appeared first on StockNews.com