Technology has changed the shape of the way that we do just about everything. From the way we shop to the way we drive, learn, and are entertained have seen a fast paced evolution as the result of technological innovation.
That innovation hasn’t ended. In fact, new technologies, many of which are blockbusters, are hitting the market seemingly every day. This has led to a large amount of investor interest in the sector.
When thinking about technology, you may immediately jump to companies like Apple (AAPL), Alphabet (GOOG) and Amazon (AMZN). While these companies are pretty good safe plays, they are also massive, with little by way of potential for growth in multiples.
Nonetheless, there are several strong stock picks in the tech sector that do have room to grow in a big way. Some of my favorites include:
Baozun (BZUN): A Chinese E-Tailer With Incredible Potential
Over the past year, Baozun has seen quite a bit of weakness over the past year, falling more than 25% in the period. However, one of the best ways to make a profit in the market is to be greedy when others are fearful, buying stocks that represent high-quality companies with low valuations. Baozun fits this bill.
The large decline that we’ve seen from the stock is the result of two factors. First and foremost, we’ve seen a broad sell off across the technology sector through this period. Moreover, Baozun is a Chinese company that has taken a hit as a result of trade war fears and slowing growth in the Chinese economy. Nonetheless, when it comes to long-term opportunities, BZUN is one to watch.
Although revenue has decelerated a bit, this has been a strategic move. The company has been working hard to shift its business to higher margin services and consignment. In fact, this shift has led to strong operating income growth, even in the face of R&D spending that nearly doubled from 2017 to 2018.
While the stock is likely to see more volatility in the short run, in the long run, it could generate some serious gains. The volatility will likely stem from the continued Trade War concerns. Nonetheless, as Trade War blues subside and the company continues to see increased margins, the potential for a strong recovery becomes more and more real.
Redfin (RDFN): Strong Growth Is Likely To Continue
Redfin is a real estate tech company that has the potential to yield serious returns for investors. The company banks on the fact that selling a home is hard work. Moreover, the cost associated with buying and selling homes is another pain point for consumers. Nonetheless, Redfin aims to change that and has seen serious early success.
The company uses proprietary software that streamlines the paperwork involved in buying and selling real estate. This alleviates a lot of the pain involved in the process. To alleviate the financial pain, the company charges listing fees as low as 1%. Considering that the average price of a home in the United States is nearly $200,000, a 1% listing fee compared to the average of 6% or so is a huge savings.
Interestingly, the low listing fee doesn’t mean that those who use the service have to sacrifice quality. In fact, Redfin has its own local agents that assist through the process with access to digital tools not available elsewhere.
This is likely the reason that the company is growing so quickly. 2018 revenues climbed 30% over revenue generated in 2017. The company’s total share of the US real estate market grew a tenth of a percent to 0.81%. This is where the opportunity lies.
While the company’s overall market penetration is minimal, it is seeing strong growth as more and more consumers see the low cost model as a favorable option. Moreover, the low market penetration means that the company has plenty of room for growth ahead, with guidance that suggests that revenue could grow nearly 30% through the 2019 year as well.
All in all, with an offering that is unmatched in the industry, a relatively low level of market penetration, coupled with strong growth in revenue, I believe that Redfin represents a compelling investment opportunity that’s worth looking into.
Galaxy Next Generation (GAXY): Taking Teaching To A Whole New Level
The education industry is going through a bit of a technological evolution at the moment. Galaxy Next Generation is on the leading edge of this evolution. As children find screens more engaging than pen and paper, the company has found a way to capitalize on this trend.
The company is a distributor of interactive educational technology hardware and software, that is designed to increase engagement in the classroom within a fully collaborative instructional environment.
Importantly, Galaxy Next Generation is not a reseller. In fact, the company has a robust line of private label interactive touch screen panels. Along with these panels, the company has several national and international branded peripheral and communications devices.
At the moment, investors have a unique opportunity to get in while the fire is heating up so to speak. In recent months, Galaxy Next Generation has been aggressively expanding domestically and has plans to do the same on an international level.
In fact, over the past several months, Galaxy Next Generation has climbed from 16 resellers to 29 resellers in the United States, nearly doubling its sales force with revenue growth that shows its success.
The market potential here is incredible as well. The smart education market is growing rapidly, with a CAGR of nearly 23% that is expected to drive the market to be worth $994 billion by the year 2024. With a market cap of just under $20 million, accessing even a small portion of this market would lead Galaxy Next Generation to provide incredible growth for investors that get in early here.
All in all, with a relatively low market cap that offers up serious potential, aggressive expansion activities, and increasing adoption of the company’s technology, GAXY is a stock that’s well worth looking into.
Himax Technologies (HIMX): A Takeover Target If There Ever Was One
Himax Technologies is a Taiwanese chip maker that has been dealt a bad hand over the past year. Like many others in the technology space, the company has been the victim of the broader sell off. However, it’s this sell off that makes the stock so attractive.
Himax develops the chips that act as a go-between for a device’s processor and its display screen. As a result, the business is very cyclical, riding the ebbs and flows of supply and demand for televisions, smartphones, tablets, and other devices.
Nonetheless, a big reason for investor interest in the stock has to do with its non-display driver business. While this division only makes up around a quarter of the company’s revenue, it has been the most consistent and is arguably the division that has the most potential for growth. These are the types of chips that are critical for augmented reality, machine vision sensors, and 3D sensing for technologies like facial recognition.
In this particular area, we are seeing large investments being made by some of the world’s largest companies. This is where the recent sell off, leading to blues for the stock, has created an opportunity.
There’s no denying the fact that Himax Technologies’ IP is incredibly valuable. Moreover, as we see more adoption of innovative technologies like augmented reality, machine vision, and more, this IP only becomes more valuable.
Considering the sell off that we’ve seen in HIMX over the past year, erasing well over 50% of the stock’s value, this IP is trading relatively cheaply. So, it’s not surprising to see that there has been quite a bit of takeover chatter over the past year.
Considering the market cap of just over $1 billion, it would be very easy for a big player to take the company over at a strong premium. With the work that the company has done in the world of cutting edge technologies, there’s no doubt that the Apples, Amazons and Googles of the world could benefit greatly from acquiring the company.
Nonetheless, even without an acquisition, the declines that the company has seen over the last year has led to what I see as an incredible discount. In terms of long term growth, I believe that there is plenty of room for gains ahead.
GoPro (GPRO): A Risky Play, But A Comeback Could Make Millionaires
Finally, we have GoPro. I’ll admit, I’ve had plenty of bad to say about this company in recent years. Not to toot my own horn, but I was right. Since my warnings started in mid-2015, GPRO is down more than 85%. While I still see this as a relatively risky play, I will admit that my view is finally beginning to change.
There are a few things that GoPro has going for it. First and foremost, the company is arguably the leader in extreme action cameras. In fact, if you ask the average Joe who is the closest competitor to the company, chances are that they wouldn’t be able to answer the question. This type of leadership is always a good thing.
The big issue for GoPro over the years is that it has not been able to appeal to a larger audience. Sure, kayakers (including myself) are willing to $350 for a good action camera and maybe another $400 for attachments that will protect it through the abuse that is extreme sports. But, mom probably isn’t going to need or want one.
The reason that the stock is becoming more attractive has to do with the financial discipline that the company has started to display. Recently, the company has been driving down expenses, including spend on research and development. While there is the risk that the company may lose its leading edge over time with less innovation, the reduction in spend is important at the moment.
We have also started to see an increase in revenue at GoPro. In fact, in the first quarter, revenue was up 20% year over year, suggesting that we are starting to see a change in tides. While the risks are ever present here, I believe that GoPro is at least worth a look. Should all go well, it could have the potential to gain in multiples in the long run.
The technology sector is a massive one with several options for investors. However, the shear volume of options makes it hard to decide where to go. Nonetheless, I believe that the stocks mentioned above, have the potential to yield incredible long run gains.
Read all relevant disclosures at CNA Finance.