After a stock has risen, investors’ tendency is to think about where the price used to be. As a result, many hesitate before making a purchase — a phenomenon known as anchoring. But the right decision is often the opposite action. Businesses that have a proven track record of success, and thus have a rising stock price over time, are some of the best ones to buy.
Speaking of businesses flying high right now, three Fool.com contributors think NVIDIA (NASDAQ:NVDA), Fastly (NYSE:FSLY), and Sea (NYSE:SE) are worth considering if you don’t own them yet — even after triple-digit percentage returns in 2020. Here’s why.
The future leader in computing power?
Nicholas Rossolillo (NVIDIA): This top semiconductor company is no secret. Driven by its graphics processing technology (historically the realm of high-end video games), NVIDIA has been finding all sorts of new outlets for its chip designs. Shares are up over 1,900% over the last five-year stretch alone as a result.
At this point, there’s no denying NVIDIA trades for a hefty price tag. Shares currently trade for a respective 23 and 81 times trailing-12-month sales and free cash flow. That kind of valuation is usually reserved for small but fast-growing up-and-coming businesses. But with a market cap of over $340 billion, this is nothing less than a tech juggernaut.
But before you think you’ve missed the boat forever, here’s why I’m still buying: NVIDIA is still growing incredibly fast and is expected to continue to do so for the foreseeable future. Through the first nine months of 2020, the company’s revenue surged 49% compared to a year ago. Management’s outlook for the fourth quarter is for another 54% year-over-year increase in sales to $4.8 billion. All of that immediate-term growth is already factored into the current price. But NVIDIA is using its present momentum to set itself up for rapid expansion over the course of the next decade and beyond.
The company is in the process of acquiring ARM Holdings, a leader in semiconductor design and licensing. NVIDIA is also at the heart of the growing AI industry, which tech researcher IDC thinks will double in size by 2024 and reach $110 billion a year in global spending. The graphics specialist is also disrupting the massive cloud industry, releasing multiple new hardware designs in the last year to gobble up share of the modern data center and plenty of new software built on its hardware’s capabilities. And NVIDIA continues to uncover plenty of other uses for its chips at a rapid pace, helping researchers across multiple industries from healthcare (genomics and medical imaging) to transportation (autonomous cars and robotics). If you haven’t bought NVIDIA yet and have 10 years to wait, this is a top-notch play in the world of next-gen computing.
Grab this skyrocketing networking stock while you can
Anders Bylund (Fastly): Content delivery networks (CDN) are all the rage these days and Fastly is an up-and-coming provider of premium services in that space.
The company is digging a moat to separate itself from older and larger industry peers such as Akamai Technologies in a couple of ways. Fastly’s network includes edge computing tools at every connection point, which lets customers build advanced data processing solutions closer to their own end users and customers. Signing up for Fastly’s services is a simple point-and-click experience, while Akamai requires that you negotiate a deal with one of their sales reps. Fastly’s business model is tailor-made for enterprise customers with advanced data processing needs, but the company also caters directly to the ever-changing needs of smaller businesses.
Fastly’s share prices have quadrupled in 52 weeks, but the stock still trades nearly 30% below the annual highs of October. This volatile stock is a day trader’s nightmare but it’s also a great buy at nearly any price for investors with a long-haul focus. The company is addressing a massive market worth roughly $35 billion per year, and Fastly’s trailing sales of $267 million barely scratched the surface of that huge opportunity.
Buy Fastly today and watch it mature over the next 5 to 10 years, ignoring the market noise along the way.
The next FAANG or BAT in the making is still a buy
Billy Duberstein (Sea Limited): Sure, the large-cap internet FAANG stocks are nice, as are their their counterparts, the “BAT” in China (Baidu, Alibaba, and Tencent Holdings). But with these behemoths already trading at very large market caps, the potential for massive multi-bagger returns in a short amount of time may be over.
However, another massive internet platform in the making could be Sea Limited, which appears to be assuming the throne in Southeast Asia, along with a recent entrance into South America — two under-penetrated geographies in terms of digital services and e-commerce.
Sea Limited is kind of like a mixture of Tencent and Alibaba; of note, Tencent has a roughly 25% stake in Sea Limited, and helped the company launch its initial Garena video gaming platform back in 2010. Sea Limited then launched its payment platform now named SeaMoney in 2014, then Shopee, its e-commerce platform, in 2015.
In just the past few years, Sea Limited has proven its ability to out-execute competitors in not one but all of these fields, and in each of the major Southeast Asian countries. It hit a grand slam home run with its first-ever in-house developed game in the free-to-play Free Fire late in 2017, which has become a massive international hit. Even three years later, Free Fire helped power Sea’s digital entertainment revenue 72.9% higher in the third quarter, with active users up 78% and paying users up 124%.
Shopee has miraculously catapulted to become the leading e-commerce platform in Southeast Asia in just five short years, with 103% gross merchandise volume growth last quarter and revenue skyrocketing 173%. Given the under-penetration of e-commerce in the region, there is still massive upside there.
Meanwhile, while SeaMoney is a relatively small part of the business, Sea saw a huge increase in adoption, with financial services revenue up eight times the year-ago quarter. Sea also just obtained a digital banking license in Singapore, one of only four companies to obtain one, and then acquired Indonesia’s PT Bank Kesejahteraan Ekonomi (Bank BKE) earlier in January.
Clearly, Sea Limited is in an aggressive full-court press to establish itself as the dominant consumer ecosystem in Southeast Asia, a region with over 600 million people, and where digital services still have room to grow. And it has its eyes on South America, a region with another 600 million-plus people.
While Sea looks expensive on just about any metric based on current earnings or sales, consider that its market cap is only $120 billion. Compared with the trillion-dollar-plus FAANG stocks, Alibaba at $725 billion, and Tencent at $844 billion, there is still plenty room for Sea Limited to appreciate in the years ahead.