In this article we will take a look at the 10 best tech stocks to invest in for long-term. You can skip our comprehensive analysis of the technology industry and go directly to the 5 Best Tech Stocks to Invest in For Long-Term.
The previous year was a somber one for many in the world. Millions of lives were lost to the COVID-19 pandemic, small business owners were forced to shut down or liquidate operations, and social distancing restrictions confined large parts of the world population to their homes for months. In the midst of all the chaos, there was a bull trend in the stock market for technology stocks that had adapted to the new economic conditions and seemed to thrive in them. By the end of the year, five big tech stocks accounted for almost 20% of the S&P 500 Index.
To put the number into perspective, it is worthwhile to note that the S&P 500 Index ranks the biggest companies of the United States according to their market capitalizations. A 20% weightage for US-based tech stocks at the beginning of 2021 meant that these companies accounted for roughly 20% of the market as a whole. The top ten firms alone make up more than 26% of the total value of the index now where Tesla, Inc. (NASDAQ TSLA) and Berkshire Hathaway Inc. (NYSE: BRK-B) join the tech firms as the other big players.
The dominance of the technology stocks on the stock market is explained by the returns they offer to investors globally. Over the past twelve months, the Technology Select Sector SPDR Fund (NYSE: XLK), an index that measures the performance of technology stocks on the S&P 500 Index, has outperformed the wider market as a whole with a total return of 87.7%, beating the 83.1% in total returns of the Russell 1000. During the pandemic, as business, education, and even communication went solely digital, the tech sector became the driver of the economy.
The share price of big technology companies like Apple Inc. (NASDAQ: AAPL) and Amazon.com, Inc. (NASDAQ: AMZN) was up 80% and 74%, respectively, at the beginning of the year from the low point of March 2020, compared to the average 14% increase in stock prices as a whole during the period. The giants of the tech industry have also facilitated the steady rise of the telecom and information sectors. These three sectors of the economy now make up more than 40% of the S&P 500 Index and look set for further growth in the future.
Tesla, Inc. (NASDAQ: TSLA): Case in Point
Some analysts are skeptical about soaring valuations and stock prices of technology giants and growth companies like Tesla, Inc. (NASDAQ TSLA). Few can actually look into the future and imagine the profitability and impact of innovative companies. For example, in 2019, Morgan Stanley gave a $10 worst-case price target for Tesla, citing rising debt and geopolitical factors. Last year, Gordon Johnson from Research said at the time that Tesla, Inc. (NASDAQ TSLA) was “detached” from reality as he questioned the company’s unit sales, its future in China and highlighted the increasing competition in the market. But all these bear cases proved to be wrong in hindsight, thanks to Tesla’s record-setting car deliveries and new technologies. As of April 23, TSLA is trading at around $709. Many famous investors and hedge funds are setting new, baffling price targets for the company. ARK’s Cathie Wood earlier this year stunned investors by setting a $3000 price target for the electric car company.
However, everything that glitters is not gold. Even though it might be a good idea to invest in technology stocks for long term gains, it is worthwhile to note that there is a boom or bust trend in the tech world where industry giants that do not have diverse portfolios run the risk of being forced out of business as new technology enters the market. Innovations in artificial intelligence, the internet of things, and fintech are prime examples. The disruption caused by fintech alone has clobbered the normally well-reputed financial services sector in the business world.
Choosing valuable stocks for long term has become extremely important in the current age of market speculations, soaring valuations without underlying fundamentals and financial volatility, which is causing even the experts to struggle. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context in mind, here are the 10 best tech stocks to invest in for long-term gains.
Best Tech Stocks to Invest in For Long-Term
10. Shopify Inc. (NYSE: SHOP)
Number of Hedge Funds: 90
Shopify Inc. (NYSE: SHOP) is an Ottawa-based e-commerce company. It is the largest internet-based shopping platform in Canada. Shopify is different from other e-commerce giants in that it offers businesses integrated solutions for selling their products on its platform. Business owners can expect a dedicated set of features if they sell on Shopify, including mobile application services, brand management and social media support. The company was founded in 2006 and is placed tenth on our list of 10 best tech stocks to invest in for long-term gains.
On March 31, Shopify shares jumped after Stifel, a financial services firm, launched coverage on the company stock with a Buy rating. Stifel set a price target of $1200 for Shopify and an analyst at the financial services firm backed the international expansion plans of Shopify for sustainable growth in 2021.
Out of the hedge funds being tracked by Insider Monkey, Hong Kong-based investment firm Tybourne Capital Management is a leading shareholder in the firm with 191,400 shares worth more than $211 million.
“While we are pleased with the results of these specific purchases, we made a huge mistake of omission at that time. This mistake will likely be one of the biggest we ever make in our careers. Specifically, we did deep work on Shopify and loved everything about the business qualitatively. Unfortunately, we ultimately found ourselves unable to get comfortable with the numbers.
We built our model up from the key performance indicators (KPIs) that drive revenues. Our last save of the model dated 8/3/2016 looked as follows: (Page 2). These numbers seemed right from everything we understood about the company. While we tend not to rely on sell-side consensus estimates before finishing our own workup of the business, we do give them a look once we feel comfortable with how we have approached our analysis as it is often helpful to get a sense of what the average participant in the market expects the business to do. With Shopify, the sell-side consensus was so far from where our numbers were shaking out, it seemed almost impossible that we were basing our analysis on the same underlying information. Our natural next step was thus to take the sell-side consensus data and work backwards to figure out the implied expectations on each of the key revenue drivers. Here is what the sell-side consensus looked like as at the time: (Page 2).
Shopify’s actual revenues for 2016-2018 ended up being $389m, $673m and $1,073m. In other words, not only were we justifiably far more optimistic than the consensus estimate, but we also were far too conservative in terms of how the company actually performed.
The nature of our job as securities analysts is to take calculated risks, in an uncertain world where the “true” answer is inherently unknowable before the fact. We operate in what many call an “efficient market” and subscribe to the belief that for the most part, markets are generally pretty efficient and it requires differentiated analysis to find a return above what the market can offer. So why did we pass on Shopify despite 1) deeply believing in the qualitative elements of the business; and, 2) seeing a meaningful gap between what we expected and the consensus expected? The answer is unfortunate but simple: we lacked confidence in ourselves. It was the first time we truly experienced such a stark divergence between our expectation and the consensus and the result was the inclination was to pound ourselves over the head with how dumb we must be, rather than the other way around. We also learned that the truly great companies use their strong business advantages, smart management and execution to raise the bar every step along the way. Obviously this is a cycle which cannot continue ad infinitum, but especially in instances where our qualitative work identifies the inherent strengths in the business and the numbers shake out to be quite fair, the consistent “raising of the bar” can be a potent driver for the stock.
Please do not judge us too harshly for our mistake on Shopify, for we have from the very beginning made one commitment above all else to both our clients and ourselves: that we will be better today than we were yesterday, and better tomorrow than we are today. While this mistake was quite costly, it ended up being a key confidence and process builder.”
9. Match Group, Inc. (NASDAQ: MTCH)
Number of Hedge Funds: 72
Match Group, Inc. (NASDAQ: MTCH) is a Texas-based technology firm that runs many popular online dating services including Tinder, Match.com, Meetic, OkCupid, Hinge, PlentyOfFish, Ship, and OurTime. It owns a total of 45 such companies overall. The firm has tens of millions of subscribers on the digital platforms it operates. It was founded in 2009 and is placed ninth on our list of 10 best tech stocks to invest in for long term gains. The firm has a market cap of $38 billion and posted an annual revenue of more than $2 billion in December 2020.
In February 2021, the company announced that it was buying Hyperconnect, a Korean social media firm, in a deal worth $1.73 billion, The purchase was the largest acquisition of Match Group to date. On April 12, Match Group stock gained after financial services firm BTIG upgraded the rating on the firm to Buy from Neutral.
At the end of the fourth quarter of 2020, 72 hedge funds in the database of Insider Monkey held stakes worth $3.7 billion in the firm, up from 61 in the preceding quarter worth $2.8 billion.
Stewart Asset Management, in their Q1 2021 investor letter, mentioned Match Group, Inc. (NASDAQ: MTCH). Here is what Stewart Asset Management has to say about Match Group, Inc. in their Q1 2021 investor letter:
“During the first quarter, we initiated a new investment. We bought shares in Match Group, which is the leading global provider of online dating services. Match operates both a free service and a paid subscription service. It offers its services via mobile apps like Tinder and Hinge, as well as legacy services like Match.com. Match Group has tailored apps that cater to many demographic groups both in the U.S. and internationally.
The online dating market has grown in the U.S., from a single-digit percentage of new relationships in the 2000s to about forty percent today, according to the Pew Research Center, an independent social research organization. The company’s addressable market is large. In the U.S. there are about 50 million singles under 40 years of age and there are 600 million singles globally who have smartphones. Match currently has just 11 million paying subscribers globally. As the stigma towards online dating diminishes worldwide, subscribers and utilization should continue to grow.
Despite spending little on advertising, the company’s user and subscriber base has grown. As this base expands, its network effect strengthens. Once Match gains a new subscriber there is clear lifetime value at very little additional cost. This incremental profitability affords Match a wide operating margin and strong free cash flow. Worth noting is that the largest cost to acquire a new subscriber is the app store fee. This fee may decline over the next five years.
This enviable business model has grown its earnings 30% per year for the last five years. Our research leads us to believe that this growth is sustainable for the next half-decade and perhaps longer. Lastly, given Match’s low incremental cost of servicing an additional subscriber and its proven ability to introduce higher-priced services, we would expect that Match will be relatively shielded from any negative inflationary effects and any accompanying higher costs.”
8. International Business Machines Corporation (NYSE: IBM)
Number of Hedge Funds: 51
International Business Machines Corporation (NYSE: IBM) is an American technology company. The firm, based in New York, develops and sells computer hardware and software. It has a market cap of more than $120 billion and posted an annual revenue of more than $73 billion in December 2020. It was founded in 1911 and is placed eighth on our list of 10 best tech stocks to invest in for long-term gains. IBM operates in more than 170 countries with a focus on high value profitable products.
IBM has been gaining in Asian markets in recent years. On April 22, Parle Products, one of the largest biscuit brands in India, announced that it was partnering with Intel to facilitate a transition of business to internet-based cloud services. Earlier this month, the Saudi government launched a digital payment system in the Middle Eastern kingdom in collaboration with IBM.
Out of the hedge funds being tracked by Insider Monkey, Wyoming-based investment firm Beddow Capital Management is a leading shareholder in the firm with 40,971 shares worth more than $5.4 million.
7. Salesforce.com, Inc. (NYSE: CRM)
Number of Hedge Funds: 97
Salesforce.com, Inc. (NYSE: CRM) is a San Francisco-based software company. It operates in a niche sector of the technology market, offering enterprise solutions on market automation, data analytics, and application development. As part of plans to expand its operations, the firm bought communications platform Slack Technologies for $28 billion last year. Salesforce was founded in 1999 and is placed seventh on our list of 10 best tech stocks to invest in for long term gains.
On April 8, Bank of America maintained a positive outlook for the firm with a Buy rating. Salesforce also featured among the top picks of the bank with a price target of $275. Last week, Salesforce announced a new cloud product called Service Cloud for personalized internet-based needs.
At the end of the fourth quarter of 2020, 97 hedge funds in the database of Insider Monkey held stakes worth $10.5 billion in the firm, down from 106 in the preceding quarter worth $11 billion.
Oakmark Equity and Income Fund, in their Q1 2021 investor letter, mentioned salesforce.com, inc. (NYSE: CRM). Here is what Oakmark Equity and Income Fund has to say about salesforce.com, inc. in their Q1 2021 investor letter:
“Salesforce was the final new portfolio addition. The company is executing a tried-and-true strategy in the software space of buying young, best-of-breed software companies and then driving these products into their massive installed base. Companies like Tableau, ExactTarget and Mulesoft have considerably more reach in the hands of Salesforce than they could have achieved as standalone companies. However, when Salesforce announced a deal to buy Slack Technologies, the market reduced Salesforce’s pre-announcement market capitalization by roughly $40 billion, effectively offering investors the opportunity to get Slack for free. We believe management should be given the benefit of the doubt. Slack has the potential to be a game-changing technology with a huge addressable market, and management’s track record on acquisitions has been superb. We estimate that the company’s shares now trade at a material discount to industry peer Microsoft, despite showing nearly twice the growth, giving investors the chance to own a top-tier software company at a bottom-tier multiple.”
6. Square, Inc. (NYSE: SQ)
Number of Hedge Funds: 89
Square, Inc. (NYSE: SQ) is a California-based digital payments and financial services firm. The company makes it easier for business owners to accept electronic and digital payments. It provides businesses with the devices they need to accept these payments, like Magstripe reader, a device that accepts transactions from magnetic swipe cards. Square has a market cap of more than $111 billion and posted more than $9 billion in annual revenue in December 2020. It was founded in 2009 and is placed sixth on our list of 10 best tech stocks to invest in for long term gains.
On April 20, investment advisor Rosenblatt named Square among its top picks for digital firms. An analyst at the advisory company backed the stock of Square to rally 30% compared to prices on April 19. The stock price of Square has gained more than 300% over the past year as the pandemic drives the digital payments industry.
Out of the hedge funds being tracked by Insider Monkey, Hong Kong-based investment firm Tybourne Capital Management is a leading shareholder in the firm with 629,139 shares worth more than $157 million.
RiverPark Large Growth Fund, in their Q1 2021 investor letter, mentioned Square, Inc. (NYSE: SQ). Here is what RiverPark Large Growth Fund has to say about Square, Inc. in their Q1 2021 investor letter:
“We established a position in leading Financial Technology provider Square during the quarter. Through one integrated system, SQ is a hybrid of two businesses: its Seller Business (charging small and medium-sized businesses about 3% for transaction payment processing, plus other services such as instant funds access, and software for everything from customer engagement to payroll), and its Cash App (originally for person-to-person cash transfers and now a growing digital financial services provider for consumers).
The combined business has grown gross profit at a 37% CAGR over the past five years to $2.7 billion (due to pass through costs, gross profit is more reflective of top-line growth) and we believe that the company has an enormous long-term runway, as it has less than a 2% share of a more than $160 billion market. It is our view that the company’s Cash App (which has grown from nothing in 2015 to $1.2 billion gross profit last year) has a particularly large opportunity with its powerful ecosystem of digital financial services including digital wallets, direct deposits, stock trading, bitcoin trading, and business and tax services, which are all relatively new. The vast majority of Cash App’s more than 36 million users are younger and, importantly, are willing to replace their bank and other financial services accounts with the app.
We estimate that the company can grow its gross profit more than 30% and EBITDA more than 50% annually for the foreseeable future, and while most of the company’s current profit is from its Seller Business, we believe most of Square’s future value will be from its Cash App business.”
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Disclosure: None. 10 Best Tech Stocks to Invest in For Long-Term is originally published on Insider Monkey.