Per the usual, it has been a year of twists and turns for the tech sector.
Companies such as Zoom (Yahoo Finance Company of the Year) and Slack (which will soon be part of Salesforce) have become household names and vital communication tools with people stuck inside during the COVID-19 pandemic. Demand for notebook computers has gone through the roof with employees working from home, benefiting companies like Dell and HP. The shift to the cloud has only accelerated this year in large part because of the health crisis, lifting the financial fortunes of Microsoft, Amazon and Google.
And of course, a year of tech wouldn’t be a year of tech if lawmakers weren’t attacking the powers of Facebook, Google, Apple and Amazon (notably the two former names).
Tech watchers on Wall Street expect a lot of the same trends that lifted the bottom lines — and stock prices — of so many companies to remain intact for 2021. But Piper Sandler analyst Brent Bracelin says three tech trends in particular stand out as potential money-making opportunities even with valuations looking rich.
“Despite increasing risk of a cyclical rotation pressuring tech multiples next year, we remain bullish on the 3-5 year growth prospects for digital darlings. We have a positive bias on software and internet entering 2021 but would not sleep on semiconductors that could have a banner year,” Bracelin wrote in a new note.
Here are three of Bracelin’s key tech trends and potential stock winners.
Theme 1: Digital awakening
Winners: Lemonade; Twilio; Unity Software; nCino; Avalara; Chegg; Zoominfo; Asana, Slack
Bracelin thinks the ongoing shift to the cloud will be a strong growth driver for numerous tech companies next year. He believes enterprises are having a “digital awakening,” as executives realize they haven’t spent enough on the cloud in the lead-up to the pandemic and must now play catch up in order to satisfy new demands in the business.
“The first and most significant thematic that was reinforced by our latest CIO survey was the premise that cloud and digital adoption at 10% of enterprise and 15% of consumer spend entering 2020 would continue to accelerate post pandemic into 2021-2022,” he wrote.
Bracelin isn’t alone on the Street with a very bullish view on the cloud.
“A key dynamic playing out in the tech world over the next 12 to 18 months is the secular growth areas around cloud and cybersecurity that are seeing eye popping demand trends we have not witnessed in our 20+ years of covering tech stocks on the Street. The accelerated path to the cloud and work from home environment is unprecedented as enterprises and governments of all shapes and sizes adjust to a more virtual workforce for the foreseeable future,” Wedbush tech analyst Dan Ives says.
Theme 2: Cloud plus pay
Winners: Bill.com Holdings; BigCommerce Holdings; Shopify; Coupa Software; Tyler Technologies; Ceridian; Intuit; Workday
The digital payments shift is moving beyond the consumer-focused names such as PayPal to enterprises, Bracelin contends. That opens the door for more tech companies to participate in the digital flow of transactions. Bracelin calls this the ‘cloud plus pay’ investing theme.
“The second biggest thematic we are focused on is the rise of business-to-business payments. We see a new class of software-as-a-service models proliferating in 2021 that augment high margin subscription revenue base with new digital payment streams that can help accelerate growth and profitability,” Bracelin says.
The CEO of Intuit (one of Bracelin’s winners) Sasan Goodarzi recently struck an upbeat tone on his business headed into 2021 in an interview with Yahoo Finance Live, fueled in part by its $8.1 billion acquisition of Credit Karma. It looks like Bracelin may be on the mark, at least when it comes to Intuit.
Theme 3: Digital exhaust
Winners: Snowflake; MongoDB; Alteryx
Bracelin’s “digital exhaust” theme is probably the most emerging one of the three he discusses. But, the underlying drivers of the theme partially explains the impressive response to data cloud play Snowflake’s IPO this year.
“The third thematic that we’re focused on is a byproduct of the accelerating shift to digital and cloud, which is digital exhaust. The vast majority of information created (97%) has historically been stored, processed, or archived. As new mountains of digital exhaust are created, we expect AI will have an increasingly critical role and an entirely new crop of digital disruptors that help convert digital exhaust into actionable insights in real-time,” explains Bracelin.
To this end, Snowflake CEO Frank Slootman recently told Yahoo Finance Live his emerging technology is now mission critical for businesses.
“Snowflake is 100% essential, and I am not just saying that because we are Snowflake,” Slootman told Yahoo Finance Live. “If you look at the history of cloud computing, the data later is crucial and essential.”
What’s hot from Sozzi:
Watch Yahoo Finance’s live programming on Verizon FIOS channel 604, Apple TV, Amazon Fire TV, Roku, Samsung TV, Pluto TV, and YouTube. Online catch Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, and reddit.