After all, there are plenty of examples of high-flying companies that didn't have a penny of profits to speak of but went on to deliver massive outperformance – with Amazon.com (AMZN) and Tesla (TSLA) as two of the most prominent examples.
That's because tech stocks are unique in their ability to grow quickly and sometimes turn a money-losing operation into a massive cash cow once they reach critical mass.
It's not that traditional metrics like operating profits and price-to-earnings (P/E) ratios don't matter exactly, but investors should be keenly aware of the limitations these numbers have when picking tech stocks.
So what should you watch then?
Well, top-line, or revenue, growth is one important metric. And big buying pressure from Wall Street based on analyst optimism is another.
Here's a list of 11 highly-rated tech stocks, based on analyst scores from S&P Global Market Intelligence. For investors who aren't tied to traditional measures of profitability, take a look at these names in the sector – which could be risky, but still have breakout potential.
Tech stocks have struggled in recent months, but analysts are bullish on the growth prospects for these 11 picks.
© 2021, The Kiplinger Washington Editors, Inc.
While the typical S&P 500 stock has a forward P/E of 23, COHU is only 15. That means investors can enjoy significant growth without paying a significant premium for it.
Market value: $4.4 billion
ACI Worldwide (ACIW) is a payments systems company that serves as an electronic intermediary between banks, billers and merchants.
In other words, ACIW is concerned with being at the very center of mobile payments infrastructure instead of worrying too much about making sure it has a mobile payments app with significant market share.
That makes ACIW a very different approach to cashless transactions in that its innovations center around improving fraud protection and reducing "interchange fees" that are billed to a merchant each time it digitally charges a customer account.
In an age of 24-7 payment processing and a constant drive to reduce friction and inefficiencies in payments, ACI Worldwide is an incredibly interesting opportunity to many investors as it now powers digital payments for more than 6,000 firms globally that execute $14 trillion each day in transactions.
It's not just narrative either, as the fiscal year (FY) 2021 earnings forecast for ACIW is for $1.15 per share – almost double the 62 cents it posted in FY2020. What's more, those profits are expected to grow to $1.28 next year.
Admittedly, revenue growth is not as impressive. But in early 2020, activist investors at Starboard Value started building a stake in the tech stock, and have been pressing the company to maximize shareholder value in any way possible – including the exploration of a potential sale.
In February, Starboard helped usher in two new independent directors to ACI Worldwide's board, thanks to its roughly 8% ownership stake. Other investors on Wall Street have been enthusiastic about the move, hoping that one way or another this shakeup will help the tech stock move even higher in 2021 – either through continued operational improvements or a big one-time transaction.
One of the more straightforward tech stocks on this list, Axcelis Technologies (ACLS) is a semiconductor service company that manufactures ion implanters – the fancy name for the equipment that is fundamental to making microchips.
If you care about the science, ion implantation is a kind of high-tech coating process by which ions of one material are implanted into another solid material to change the physical and chemical properties of the surface.
The necessity of this process should be obvious when you consider the tiny yet intricate components inside modern devices, which means building a bunch of different parts and gluing them together simply isn't going to cut it.
Admittedly, Axcelis is a niche play. It doesn't have patented microchips itself or flashy consumer-oriented products, so it's basically a glorified middle man.
However, if you look at all the headlines lately about supply chain disruptions and global microchip shortages that are curtailing everything from auto production to home appliance sales, it is quite obvious that Axcelis Technologies is a tech stock that is in demand now more than ever.
Just look at the fundamentals for a quick take on this growth path. Current fiscal year revenues are set to surge 17%, followed by another 11% next year. At the same time, current-year earnings per share (EPS) is forecast to jump more than 44% this year and 32% next year.
Shares have slightly outperformed in the last 12 months, with ACLS up about 45%, compared with 41% or so for the S&P 500 Index over the same period. But with some industry insiders predicting the semiconductor disruptions to last as long as two years, there could be continued growth ahead for this tech stock in 2021 and beyond.
Market value: $1.4 billion
Cohu (COHU) is a unique tech stock that serves the semiconductor industry.
Rather than being a chipmaker itself, though, it is focused mainly on inspection equipment serving clients internationally. This is perhaps not as sexy to some investors as making the flashy, branded chips that offer big margins and power cutting-edge consumer electronics.
However, it's a highly lucrative business to be in, as manufacturers are creating increasingly complex chips that don't have much margin for error as customers demand reliability, as well as great performance.
What really tells the story for COHU stock is its profit expansion, as earnings per share are expected to increase from $1.19 last fiscal year to $3.17 in 2021 – nearly three-fold growth driven by a revenue expansion of about 43%, if this year's forecasts hold.
Shares have skyrocketed about 150% in the last year amid this momentum, but it's important to note that at current prices, COHU is pretty fairly valued based on that EPS guidance.
While the typical stock in the S&P 500 has a forward P/E of about 23, COHU is only about 15. That means, unlike in other high-profile tech stocks, investors can enjoy the prospect of significant growth without paying a significant premium for it.
Market value: $1.8 billion
Medallia (MDLA) is a "big data" and artificial intelligence (AI) company. It seeks to analyze data and provide structure to the unstructured information that many businesses currently don't know how to wade through on their own.
You might be saying to yourself that all that is just Silicon Valley hoopla – and you're right!
But consider this practical example: a financial firm digs through its customer data to find "signals" hinting that some account holders are likely to start investing in stocks or possibly take out a mortgage in the next few months. It then puts well-timed and personalized marketing in front of them.
Sounds much more meaningful than a bunch of buzzwords now, doesn't it?
That's effectively what Medallia does – it helps organizations maximize the potential of their customers, partners and employees.
Just in case you're still not convinced, consider the fact that this company saw its sales surge from $402 million in FY2020 to $477 million in FY2021 that ended in March (19% growth). And revenues are projected to rise to $569 million this fiscal year (another 19% increase).
While the tech stock has stalled following a red-hot run that lasted from November through February, it remains very much in-favor among Wall Street analysts thanks to its unique value proposition and impressive growth story.
Market value: $5.4 billion
What is there that's bad to say about Microsoft (MSFT)?
Its scale is unrivaled as the second largest U.S. corporation as measured by market capitalization, sitting just behind Apple (AAPL). And it's expected to pull in more than $166 billion in annual revenues this fiscal year.
Its balance sheet is as bulletproof as they come, with $125 billion in cash at present. Plus, it's one of just two U.S. stocks with a AAA credit rating from Standard & Poor's – healthcare icon Johnson & Johnson (JNJ) is the other.
The real appeal, however, is that MSFT is still growing at a pace that puts other companies to shame, despite its already impressive dominance. Specifically, revenue is set to expand 16% this year, with earnings per share projected to jump 35% from $5.76 in FY2020 to an estimated $7.77 in FY2021. Those stats are encouraging for any stock, let alone one that is already on the top of the heap.
That's what makes Microsoft such a screaming buy. Because in addition to its organic growth, it has the deep pockets to make other moves like buying back $7 billion in shares in its most recent quarter – and $20 billion in the first nine months of its fiscal year that ends in June.
On top of that, there's still plenty of dough left over for a rapidly increasing dividend, currently yielding 0.8%, that has more than tripled from 16 cents a share per quarter in 2011 to 56 cents a share presently. When you're marrying strong growth with a commitment to shareholder value through dividend and buybacks, it's no surprise the Wall Street community is almost universal in its approval of this tech stock.
Market value: $2.0 trillion
Anyone who read the news reports from early May about the cyberattack that disrupted U.S. energy infrastructure in the Northeast should immediately see the appeal of Palo Alto Networks (PANW).
This cybersecurity platform provides firewalls and other software, including its branded Panorama solution. PANW's software is deployed on an organization's information technology (IT) network to attempt to safeguard the entirety of its assets regardless of where they are or how they are used.
Investors will be happy to learn that Palo Alto Networks products are offered as subscription services, meaning entities that want to guard against threats like malware, data loss and other attacks are on the hook to keep paying regularly instead of just incurring a one-time charge for deployment.
And as PANW services mainly medium to large enterprises that span financial services, government entities, healthcare companies and telecommunications firms, there is a very strong foundation for revenues here.
That doesn't mean Palo Alto is just resting on its laurels, however, as this cybersecurity stock is forecast for about 24% revenue growth this fiscal year and another 18% in FY2022. It's also comfortably profitable, with earnings per share expected to rise 23% this year and 19% next year.
PANW is a great example of a tech stock whose offerings scale up easily without eroding margins, and investors could see this as both a growth opportunity as well as a sort of hedge against the threat of persistent cyberattacks in the years ahead.
Market value: $36.1 billion
Palo Alto Networks
Market value: $1.8 billion
The pandemic has accelerated the move away from traditional banking — which could help catapult mobile payments giant PayPal to even greater success in the years ahead.
You may be familiar with the old-school digital payments company PayPal Holdings (PYPL) from your days prowling online auctions a decade ago. But you may not know that this firm was acquired by eBay (EBAY) for $1.5 billion almost 20 years ago, and it is now valued at roughly 200 times that amount.
PYPL has been very busy staying ahead of the curve when it comes to mobile payments and cashless transactions.
For instance, it rolled up digital payments competitors Venmo and Xoom in recent years to currently command a network of almost 400 million active accounts that moved total payments volume of $285 billion last quarter.
What's more, PYPL has moved quickly to integrate budding cryptocurrencies into its platform – both to buy and hold as investments, or to pass along in transactions.
The result is a digital finance powerhouse that is forecast to top $31.4 billion in total revenues in the next fiscal year.
Clearly when you have scale like this tech stock has, the tiny fees you layer on add up in a hurry. And while declining traffic at brick-and-mortar bank branches was already well underway in recent years, the pandemic has only accelerated the move away from traditional banking – which could help catapult the mobile payments giant PayPal to even greater success in the years ahead.
Market value: $342.4 billion
One of the original cloud computing megastocks, Salesforce.com (CRM) is an enterprise-focused software firm that is concerned with "customer relationship management" – hence its catchy ticker symbol.
For those not in the marketing realm, this means using data to monitor leads and track sales progress, as well as forecasting opportunities based on trends you see.
Part of the reason Salesforce has been such a force in business circles is because CEOs and CFOs everywhere are desperate for insight into customer trends, both to forecast the year's performance and to plot future opportunities. And when Salesforce software works well, it does all this and more to easily pay for itself.
Though already the gold standard in many sales and marketing circles, CRM has not yet hit a ceiling in its growth path. Consider that after racking up more than $21 billion in revenues last year, the company is projected for 22% sales growth this fiscal year and 20% the following year.
Particularly as the U.S. economy looks to turn a corner after the pandemic and sales reps begin to pound the pavement once more, you can bet CRM is going to be more important than ever in 2021 and beyond.
What's more, in 2020, Salesforce.com was named to the storied Dow Jones Industrial Average. This occurred in part because of its dominant position in the tech sector, as well as the likelihood it will remain very relevant for many years to come.
If you're looking for a tech stock that has both impressive growth but firm footing, then give CRM a look.
Market value: $226.2 billion
If ever there was a tech stock that seemed tailor-made for the post-pandemic workforce, it's ServiceNow (NOW).
The company provides enterprise cloud computing solutions focused around streamlining and automating scattered workflows – across everything from IT management to human resources to training. And on top of that, its customizable App Engine and IntegrationHub products enable businesses to make custom applications that can have the biggest impact.
This flexibility has allowed NOW to thrive, with clients across governments, financial services, healthcare, telecommunications, manufacturing, oil and gas, education and consumer products.
As with so many tech stocks, the narrative is compelling in a vacuum, but it's important to pop the hood on ServiceNow and look at the cold, hard numbers to get a true sense of the opportunity here.
And the numbers speak for themselves: After logging $4.5 billion in revenues in 2020, analysts are projecting more than 25% growth in both FY2021 and FY2022, with NOW expected to finish the next fiscal year with $7.2 billion in sales. Earnings have exploded at the same time, surging from $4.63 per share last year to a projected $5.51 this year and $7.04 in the next fiscal year – growth of 19% and 28%, respectively.
Many employers are grumbling about undoing the remote workforce trends that shaped the early days of 2020 by necessity, but it will be incredibly difficult to put the toothpaste back in the tube when it comes to working from home (or anywhere). NOW is one of the best tech stocks to seize upon this forward-looking trend.
Market value: $108.5 billion
Twilio (TWLO) is one of those companies that's often simply dubbed a cloud communications platform or "software as a service" (SaaS) vendor, but those descriptions don't do this San Francisco tech icon any favors.
A more accurate description is that Twilio allows software developers to connect with modern, decentralized communications platforms like smartphones to help businesses reach their customers. Its services include text-based customer service chatbots for retailers, self check-ins via mobile phones for hotels, social media feedback integration, app-based loyalty programs and other engagement solutions.
Any customer who has languished on hold after calling a 1-800 number knows how little "service" is behind some customer service systems. And any business who has tried to fend off an angry user on social media knows the importance of protecting your brand in a digital age.
TWLO has taken both sides of that experience to heart in its current solutions and operations. The company has also proved its value proposition in a big way amid the social distancing phenomenon caused by the pandemic.
Specifically, Twilio saw revenues surge 55% year-over-year in FY2020 – and looking forward, analysts are plotting 44% top-line growth for FY2021. What's more, this company that only just entered the public market in mid-2016 is about to become consistently profitable based on next year's earnings forecasts.
No wonder the stock has surged about 80% in the last 12 months – and longer term, has blasted off from its initial public offering price (IPO) of $15 a share to nearly $400 a share currently.
Market value: $68.1 billion
Analyst ratings: 1.20 (Strong Buy)
Analyst ratings: 1.17 (Strong Buy)
Analyst ratings: 1.38 (Strong Buy)
Analyst ratings: 1.17 (Strong Buy)
Analyst ratings: 1.37 (Strong Buy)
Analyst ratings: 1.44 (Strong Buy)
Analyst ratings: 1.0 (Strong Buy)
Analyst ratings: 1.52 (Strong Buy)
Analyst ratings: 1.58 (Buy)
Analyst ratings: 1.50 (Strong Buy)
Analyst ratings: 1.39 (Strong Buy)
Best Tech Stocks for the Rest of 2021
(Market data and analyst estimates are as of June 30, 2021.)
PAR Technology (PAR) is a "point-of-sale" technology provider that mainly serves restaurants. Some of its top clients at present include Pizza Hut, Taco Bell and Arby's to name a few, but PAR also increasingly does business with retailers and other commercial enterprises.
The company's growth is in large part thanks to its best-in-class technology that focuses on cashless transactions. These most commonly include debit and credit cards, but its readers also process mobile payments like Apple Pay, PayPal and other solutions. And its systems help integrate mobile app ordering technology into a restaurant or store's financial systems.
Needless to say, PAR is on the right side of consumer trends – particularly after the coronavirus pandemic accelerated the move away from traditional transactions into digital orders.
Its revenues have been on a nice uptrend lately, arriving at $214 million in 2020 and expected to grow to $265 million this fiscal year and $318 million the following year. That would represent growth of 24% and 20%, respectively.
What's more, PAR just took a big leap forward with its recent acquisition of loyalty program provider Punchh that will give it new ways to build deeper relationships with both merchants and their customers.
Though PAR Technology is still operating at a loss as it invests heavily in growth, investors have a lot to be excited about with sales trends and future expansion plans. And a 134% return for the tech stock in the last 12 months isn't too shabby, either.