Tech stocks have been the path to riches for nearly a decade. In fact, the majority of gains for major stock indexes have been fuelled by tech stocks.
Fortunately, it’s not too late to take advantage. Year after year, the market has consistently underpriced these companies. Rapid growth combined with an attractive valuation is a promising combination for strong returns.
Each of the following picks look primed for a big 2020.
Priced at 25 times forward sales, few investors would call Shopify Inc. (TSX:SHOP)(NYSE:SHOP) stock cheap. But Shopify has traded at a premium valuation for years, and it’s always proven itself worthy of a high multiple.
Since 2006, Shopify stock has exploded higher by 1,780%. Apple Inc., for comparison, is up by only 150%.
The biggest issue is that the market has a tough time valuing platform companies. These businesses simply build the base level infrastructure needed for others to build on top of it. When done right, this model can provide remarkable growth that lasts decades.
The most powerful platform in history may be the Windows operating system from Microsoft Corporation. Today, Microsoft has a valuation of $1.3 trillion. Shopify is emulating the Microsoft playbook for e-commerce, which saw global sales exceed $30 trillion last year.
With a market cap of only $73 billion, Shopify stock may double or triple again without losing any steam.
Under the radar
Constellation Software Inc (TSX:CSU) is another stock that’s perpetually under-priced. Since 2006, shares are up by 6,625%.
If Shopify is taking over e-commerce, what is Constellation taking over?
Unlike Shopify, however, you’ll likely never run into a Constellation product. If you run through their offerings, you’ll almost certainly recognize zero of the applications. That’s because Constellation sells automation software to businesses, programs that run behind the scenes. Specifically, the company helps automate mission-critical processes for niche purposes.
Automating a mission-critical process for a niche purpose is a huge advantage. Because it’s niche, there often aren’t any alternatives to switch to. And as the process is mission-critical, it’s not possible to ditch the software without endangering the entire business.
This model gives Constellation high profit margins and industry-leading retention rates. Future success is simply a function of repeating this model again and again. This year should be no different.
Play the reversal
Maxar Technologies Ltd. (TSX:MAXR)(NYSE:MAXR) isn’t like Shopify or Constellation. Over the last few years, shares have lost more than 70% of their value. To invest in Maxar today is to bet on a reversal.
As I wrote last month, “When Maxar stock fell 90% in 2018, the chief impetus was a short-seller report from Spruce Point Capital, which had bets that would pay off if shares sank in value.”
Spruce Capital had many concerns — chief among them was management’s accounting practices. The firm claimed that Maxar grossly overstated its revenue and earnings. The market agreed, sending shares spiralling.
But throughout the crisis, Maxar continued to secure and renew contracts with major corporations and governmental agencies. Clearly these customers weren’t concerned about the firm’s long-term survival.
Last year, JPMorgan Chase decided that shares were so cheap that they were now a buy. The stock has doubled since that call.
The company has made other moves to ensure its stability, including a large debt refinancing and the sale of a business segment to raise cash. With the stock still 70% off its 2018 highs, there could be more room to run in 2020 as the market regains confidence.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. David Gardner owns shares of Apple. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Apple, Constellation Software, Microsoft, Shopify, and Shopify. The Motley Fool recommends MAXAR TECHNOLOGIES LTD and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.