The five most valuable tech stocks in the U.S. are known as the FAAMG stocks, or Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Microsoft (MSFT), and Google parent Alphabet (GOOGL). These stocks have been driving performance for the S&P 500 for the past couple of years, but there are four other stocks that I believe are better buys right now. While known to some investors, these companies have less name recognition than FAAMG, yet are still dominating their industries and offer the potential for strong growth and price appreciation.
FAAMG is an abbreviation coined by Goldman Sachs for the top-performing tech stocks. Michael O’Rourke at JonesTrading estimates that since the end of 2017, the FAAMG stocks account for approximately 72% of the S&P 500’s performance. There’s no denying the fact that these companies are fundamentally sound and have strong growth stories. Yet, some analysts are concerned that the stocks resemble tech stocks before the bubble burst in 2000, or the Nifty Fifty stocks in the early 70s that plummeted in the bear market from 1973 to 1974.
For these reasons, I wanted to find other stocks that, while not as large as FAAMG, still dominate their industries due to their “wide-moat” status and offered strong growth potential. Wide moat stocks are companies with substantial competitive advantages over their competitors. These companies have sustainable dominant market positions that make it difficult for companies to enter their market or competitors to challenge them. The following four stocks certainly fit these criteria: KLA Corporation (KLAC), ServiceNow (NOW), Salesforce.com (CRM), and Autodesk (ADSK).
KLA Corporation (KLAC)
KLAC designs and manufactures yield-management and process-monitoring and control systems. It dominates the process diagnostic and control segment (PDC) of the semiconductor equipment industry. During the fabrication process of semiconductors, wafers must be inspected for defects, and as chips are getting smaller, there is an increased need for PDC tools. KLAC has more than a 50% market share in the PDC market. This and the company’s technical expertise had led to its wide moat status.
The company should see continued growth due to an industry-wide transition to advanced nodes and the insertion of EUV lithography. In addition, enhanced wafer cleanliness and geometry specifications in the bare wafer market are increasing demand for KLAC’s wafer products. The company’s new product offerings, including its e-beam platform and expanding addressable market in printed circuit boards, flat panel display, and packaging, bode well for future growth.
KLAC has shown strong sales growth over the past five years, culminating in an increase of 18.8% last year. I like its profitability numbers as well, as it has an ROIC of 22% and a return on equity of 45.7%. The company has a healthy short-term cash balance, represented by a current ratio of 2.8. The stock is rated a “B” in our POWR Ratings system. It holds a grade of “A” for Trade Grade and Industry Rank, and a “B” for Buy & Hold Grade and Peer Grade.
Keep an eye on KLAC next week, as the stock reports its latest quarterly results on October 28th.
NOW provides software solutions to structure and automate various business processes via a SaaS delivery model. The company primarily focuses on the IT function for enterprise customers. The stock has very strong growth potential. Its EPS grew a whopping 1,944.4% last year and is expected to grow 24.2% next year. Sales are expected to grow by 24.5%. NOW has wide moat status due to high customer switching costs. This means it’s more expensive for customers to switch to a competitor of NOW.
This company is well-poised to benefit from strong growth in subscription revenues. Due to strong adoption of its solutions, NOW raised its 2020 guidance for subscription revenues, billings, gross margin, and operating margin. In addition to management’s rosy estimates, the company should gain from businesses and government agencies switching their infrastructure to the cloud.
Essentially this is a stock with sustainable growth potential driven by two powerful trends, digital transformation and the migration to cloud computing. When you add in its strong competitive advantages and customer loyalty, it is no wonder it is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” in three out of the four components that make up the POWR Ratings, Trade Grade, Buy & Hold Grade, and Peer Grade. It is also the #1 ranked stock in the Software – Business industry.
Similar to KLAC, the company is reporting its latest earnings on October 28th.
The next stock on this list is undoubtedly the most well-known. As king and pioneer of the CRM space, the company has strongly benefited from the remote working trend. The stock is up 53.8% year to date and still has strong growth potential. EPS grew 115.1% last year, while sales grew 31.6%. Sales are expected to grow by 17.9% next year. This makes CRM one of the most compelling growth stories in the software space.
CRM was the company that introduced the software-as-a-service (SAAS) to the world and owes its wide moat status to first-mover advantage and high switching costs. The company has benefited from strong demand for businesses looking to make a digital transformation. Now that the platform is cloud-based, it is seeing rapid adoption of its products. As CRM adds more products and solutions, it should only see its revenues increase more.
Management sees a total addressable market of $176 billion and has increased its presence in the international markets. Its recent acquisition of Tableau positions CRM to be a leader in business analytics in everything from HR to operations. The stock is rated a “Buy” in our POWR Ratings system. It holds a grade of “A” for Trade Grade and a “B” for the remaining components, Buy & Hold Grade, Peer Grade, and Industry Rank. The stock is also ranked #6 in the Software – Business industry.
ADSK is an application software company that serves industries in architecture, engineering and construction, product design and manufacturing, media, and entertainment. Its software enables design, modeling, and the rendering needs of these industries. ADSK is actually considered the global industry standard for computer design software, which gives it wide moat status along with high switching costs.
The stock, which is up 37.7% this year, has over a million users on its construction cloud network. The company’s EPS increased by 552% last year and is expected to grow 39.4% next year. Management expects sales to grow 16%-18% next year. According to CFO Scott Herren, while the company does employ salespeople, 75% of new business was generated online. Its online capabilities were able to sustain the company through the early days of the pandemic. Key catalysts for the company’s growth have been increased adoption of its BIM 360 solution, and the success of the maintenance to subscription (M2S) program,
Higher demand for its cloud-based products, design suites, and mobile solutions should drive long-term revenue growth. In addition, its acquisition of Pype should augment the user experience for its Construction Cloud users. The stock is rated a “Strong Buy” in our POWR Ratings system. It holds a grade of “A” for three out of the four POWR components, including Trade Grade, Buy & Hold Grade, and Peer Grade. It has a “B” grade for Industry Rank. The stock is also ranked #8 in the Software – Business industry.
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KLAC shares were unchanged in after-hours trading Thursday. Year-to-date, KLAC has gained 15.72%, versus a 8.60% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More…
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