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Finance

4 Top Tech Stocks to Buy Before 2021

This year has proved to be a boon for tech stocks. The pandemic induced a stay-at-home culture, which forced every household to create a work or learn desk. Companies and education institutes went digital as everyone adopted working and studying from home. Some of the biggest beneficiaries of this digital trend are Zoom Communications (ZM) and Amazon (AMZN).

Tech stocks rallied on the back of pandemic-induced traffic and liquidity from the fiscal stimulus package. The tech-heavy Nasdaq Composite Index has surged 75% since mid-March and crossed the 12,000 mark on September 2. However, the market saw a pullback over concerns around the second fiscal stimulus package. The resurgence of the coronavirus cases in the United States, Europe, and Canada ahead of the U.S. elections aggravated the pullback.

There are concerns among investors that the tech rally would fade next year as these companies’ revenue growth would slow. Hence, some investors are cashing out. At a time when tech stocks are seeing a pullback, here are four tech players that recovered and hit new highs last month on the back of strong earnings and guidance: Paycom Software, Inc. (PAYC), Logitech International S.A. (LOGI), Endava plc American Depositary Shares(DAVA), and iRobot Corporation (IRBT).

Paycom Software, Inc. (PAYC)

PAYC is not a well-known name as it works in the background. It processes salaries for many U.S. employees who still have their job. This software-as-a-service (SaaS) company, founded in 1998, provides payroll and human capital management (HCM) solutions and charges a fee on a per-employee basis. It also earns through subscriptions. A SaaS company becomes profitable when a client stays for a longer time and takes premium solutions.

PAYC was doing well before the pandemic, with its revenue and adjusted EBITDA surging 30% and 32% year-over-year, respectively, last year. This strong growth was reflected in its stock price that rose 116%. A splendid stock performance got PAYC a place in the S&P 500 Index in January.

Then the pandemic happened, which led to massive job cuts across various sectors. For a company whose profits depend on headcount, it came as a blow. In the second quarter, its revenue surged 74%, but adjusted EBITDA fell 12% on a year-over-year basis. New business drove revenue, while the cost of customer acquisition and reduction in headcount pulled down its margins.

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Despite this weakness, PAYC stock surged 41% towards the end of September and the first half of October when other tech stocks saw a pullback. This surge came as hedge fund Cooper Investors invested in PAYC. In its Q3 2020 Investor Letter, it stated, “We think Paycom can get back to its formerly very strong growth rates given a unique offering and US$800mn revenue base in a US$30bn+ addressable market that is growing mid-to-high single digits.”

As the economy recovers and jobs increase, PAYC should benefit. It will release its third-quarter earnings on November 4, which could shed some light on its road to recovery.

Analysts expect PAYC’s revenue to rise 20% next year. The stock is trading close to its all-time high. But it is a high-growth stock, which has surged at a CAGR of 50% in the last five years, and has the potential to maintain this momentum.

How does PAYC stack up for the POWR Ratings?

A for Trade Grade

B for Buy & Hold Grade

B for Industry Rank

A for Peer Grade

B for overall POWR Rating

The stock is also ranked #2 in the 96-stock Software – Application industry.

Logitech International S.A. (LOGI)

While PAYC took a hit from the pandemic, the Swiss computer peripheral maker LOGI scored from it. Three trends that pushed LOGI’s quarterly revenue above $1 billion are: remote working, remote learning, and remote gaming and entertainment. It provides higher quality keyboards, mouse, webcams, and headsets at a lower price than its counterparts.

It’s fiscal 2021 second-quarter sales rose 75% year-over-year to $1.26 billion, and net income surged 266% to $266.9 million. Sales of PC webcams, video collaboration products, and tablet accessories surged triple-digit as customers did Zoom calls and upgraded their webcams and microphones for better video and audio quality. Moreover, the back-to-school season drove demand for video collaboration products.

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LOGI is seeing a growing demand for gaming peripherals, and its sales would accelerate further as Sony (SNE) and Microsoft (MSFT) launch their next-generation game consoles this month. LOGI has raised its full-year guidance to a 35%-40% revenue increase from the previous guidance of a 10%-13% increase.

Such strong earnings and guidance pushed LOGI stock up 16% post-earnings. Like its revenue, the stock is trading close to its all-time high. But for a high-growth stock, which has increased at a 40% CAGR in the last five years, even the current price is reasonable. LOGI’s products are good gifts for the upcoming holiday season, and the new game consoles could drive double-digit growth for the stock next year.

LOGI is rated a Buy in the POWR Ratings. It holds an “A” in Trade Grade and Peer Grade, and a “B” for Buy & Hold Grade. It is also the #7 ranked stock in the 30-stock Technology – Hardware industry.

Endava plc (DAVA)

DAVA is a UK-based digital transformation company that provides application development, testing, and other IT services to a wide range of companies. The pandemic has made digitization a necessity for all organizations. It increased its revenue at a CAGR of 27.9% between 2015 and 201,9 and aims to maintain the CAGR at 15.3% between 2019 and 2023.

In the fiscal year 2020 that ended on September 30, DAVA’s revenue surged 22% year-over-year, which drove its stock 96% last year and 37% this year so far. The company has strong financials and a stable revenue growth rate. The analysts estimate DAVA’s revenue to surge 22.7% year-over-year.

DAVA stock is also trading near its all-time high. It has the potential to deliver double-digit growth in the coming years as the move to digitization accelerates.

DAVA is rated “Buy” in our POWR Rating system. It also has an “A” for Trade Grade and Peer Grade, and a “B” for Buy & Hold Grade and Industry Rank. It is ranked #26 in the Software – Application industry.

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iRobot Corporation (IRBT

Another company that benefited from the stay-at-home is IRBT, which makes home cleaning easy with its autonomous cleaning devices. It is a leader in the robotic vacuum cleaners’ market with a 52% share. Industry ARC expects this market to grow at a CAGR of 12.84% during 2020-2025.

In the third quarter, IRBT’s revenue surged 43% year-over-year to $413.1 million, driven by an 86% surge in its premium product sales. Next year could be challenging for the company’s margins if the United States imposes tariffs on China. IRBT is looking to shift its production from China to Malaysia, but the pandemic has delayed the shift to late 2021 or early 2022.

While there is a demand for IRBT’s products, margins are a risk. Hence, its stock price growth has been tepid. Last year, its stock fell 39.5%, but this year it surged 57%. It is currently trading at a 1.8% discount to its average price target of $81. The stock is trading on the higher end of its 52-week range. Analysts expect its sales to increase by 7.3%, but EPS to fall 40% next year.

IRBT has a grade of “A” for Industry Rank and a “B” for Trade Grade in our POWR Ratings system.

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PAYC shares were trading at $355.78 per share on Monday afternoon, down $8.31 (-2.28%). Year-to-date, PAYC has gained 34.38%, versus a 3.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Puja Tayal

Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More…

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