With the help of tremendously hot tech stocks including Amazon, Apple, Facebook, Microsoft, Netflix and Google parent Alphabet, the mutual fund that Joshua Spencer manages soared 35% this year as of the end of July with a 26% annualized return over the past five years.
Although he expects these tech giants to continue to thrive, Spencer says that it’s time for investors also to look beyond them to the next generation of likely superstars that he thinks will benefit the most from emerging technology trends.
Those companies include a cyber-security company fighting ransomware…a firm whose semiconductor chips will power self-driving cars…and an online video-game company that has an exclusive deal to create Star Wars games.
We asked Spencer to share some of his favorites now…
Cloud computing often is thought of as simply a remote-storage business. Customers pay companies such as Amazon, Microsoft and Google to keep their data, photos and movies on computer servers that customers can access over the Internet. But there’s a lesser known area of cloud computing that is transforming how businesses operate. The businesses are accessing software online to manage sales, handle accounting and protect data—rather than buying the software outright. The following two companies are focused on this niche, which will power their earnings growth for years to come. My favorite cloud computing stocks now…
• Proofpoint (PFPT). A few months ago, malware called WannaCry froze hundreds of thousands of computers and demanded ransom from companies and other organizations in about 100 countries. The spread of the malware was halted with the help of Proofpoint, a cloud-based company quickly emerging as a leader in cybersecurity. Proofpoint, which has been increasing profits by about 30% a year, focuses on e-mail protection services that block spam, malware and viruses. Its patented software is so effective that its clients already include more than half of the Fortune 100 companies as well as thousands of major banks, retailers, drug companies and universities. Proofpoint’s newest application, “targeted attack protection,” scans and inoculates e-mail for users whether they’re working on the company’s network, on mobile devices or even at public terminals.
• Salesforce.com (CRM) is a global powerhouse in software that enables businesses to engage with their customers, including applications for marketing and customer service as well as managing sales. The company’s products include three that each generate more than $1 billion annually in revenue. Clients range from American Express and Comcast to Dunkin’ Donuts and General Electric. Salesforce.com software becomes so important to everyday operations that the long-term renewal rate among clients is 95%. Profits at the company are expected to rise nearly 25% annually over the next five years because it has been more innovative than competitors in broadening its product lineup. Its latest applications help businesses analyze their data and recommend actions to accelerate sales and improve digital marketing.
Video-game profits used to be hit-driven like Hollywood movies. Most of the money was made right after a release as players bought game cartridges or discs. But the movement toward digital distribution, in which players can download games for their dedicated game consoles, computers and smartphones or stream them to computers and consoles, now allows game makers to rake in profits for years by selling additional content for existing games and creating online social networks that let players compete against other players around the world. My favorite online video-gaming stock now…
• Electronic Arts (EA), one of the world’s largest video-game publishers, generates revenue of nearly $5 billion a year with popular franchises including FIFA soccer, Madden NFL and the Battlefield war games that have millions of active players. The company has adapted to the new digital environment better than any of its competitors partly by using new artificial intelligence software that makes games more lifelike. It also has a blockbuster 10-year contract with Walt Disney to develop Star Wars games.
The slowdown in China’s economic growth has dampened enthusiasm for its Internet stocks. But investors are overlooking catalysts that will allow these stocks to grow much faster than the overall economy. The Chinese government has greatly restricted the ability of Western companies such as Amazon, PayPal and Priceline to operate in China. Meanwhile, Chinese tech companies have a head start operating in some other fast-growing Asian nations. My favorite Chinese Web commerce stock now…
• Ctrip.com International (CTRP) is often referred to as the Priceline.com of China. It is that country’s largest consolidator of hotel accommodations and airline ticket bookings. Its bargaining power over travel suppliers helps Ctrip continue to strengthen its position. Chinese travelers spent $261 billion on foreign travel last year, up 12% to a new record and the most by travelers from any country. Recently, Ctrip acquired British Internet travel consolidator Skyscanner Ltd. for nearly $2 billion, positioning itself to become a global booking service.
The semiconductor chip business used to be highly volatile with cyclical booms and busts that even professional investors couldn’t time successfully. But chip makers have reduced their reliance on the computer and smartphone markets by selling to a much wider variety of “nontech” industries, including appliance makers and automakers, that have become highly dependent on chips for creating advanced product features. This has opened new profit streams that can last for years. My favorite semiconductor chip stock now…
• Broadcom (AVGO) is one of the world’s leading suppliers of networking and connectivity chips used by cloud computing providers and components used in Samsung’s popular Galaxy S8 phone and Apple’s forthcoming iPhone 8. These industries must continue to spend heavily on Broadcom’s products as Internet data speeds rise, giving the company a long runway of steady profits. What’s really transformative for Broadcom, however, is the growth of electronic equipment in cars. By 2020, one in five vehicles on the road worldwide will be connected to the Internet. Broadcom’s new line of wireless chips is focused on automobile infotainment systems as well as safety features such as adaptive cruise control that adjusts to the traffic around the vehicle.
