Overall, tech companies had their best year ever in 2021. But historical stock market returns suggest 2022 isn’t likely to be as strong as last year, and that means investors need to focus more on the quality of their stock picks.
Picking winners is especially difficult when it comes to tech stocks, because part of the analysis involves making assumptions about what the future might look like, rather than just evaluating the company based on its own merits. But three Motley Fool shareholders think get up (NASDAQ: COHU)And Community (NASDAQ: CFLT), And Axon Enterprise (NASDAQ: AXON) It’s set to stand out from the broader market this year, and can be picked up now.
Leading the semiconductor industry
Anthony Di Pizzo (Coho): The semiconductor sector was a reliable performer in 2021, with iShares Semiconductor Box Crushing the total return of the centered technology Nasdaq 100 market index. But as we move through 2022, the most interesting opportunities in the industry may be in small, specialized providers rather than popular manufacturers.
With a market capitalization of just $1.7 billion, Cohu provides testing and processing equipment to the world’s largest semiconductor producers. It’s key to the inspection process, completing flaw detection in some of the industry’s smallest chips, and powering critical digital features in new cars, for example. With the auto sector hardest hit by the semiconductor shortage in 2021, Kuhu has shifted his focus to the sector to help ease supply pressures, and it now accounts for 20% of the company’s total revenue.
Cohu’s best operating environment is one in which semiconductor manufacturers are rapidly expanding their production capacity, driving demand for the company’s equipment. The pandemic years 2020 and 2021 certainly fit the bill, and some of the world’s largest auto companies predict that they will continue to face chip shortages in 2022.
That puts Cohu in great shape this year, and analysts expect the company to generate $2.95 in earnings per share. It’s comparable to $3.01 in 2021 (pending the official last quarter result), which was Cohu’s first profitable year since 2017. But more importantly for investors, it puts the company’s stock at a very cheap price-to-earnings multiple of 11 Just. This is about 65% cheaper than Cohu’s peers represented by the iShares Semiconductor ETF, which trades in multiples of 33.
The year of the Cohu outbreak was definitely 2021 from an operational perspective, but look for some follow-up in 2022.
mission critical service
Jimmy Loko (@Confluent): When it comes to businesses that can break out and experience significant growth over the coming years, there is probably no other company that can experience stronger growth than a market leader in an industry that will nearly double in the coming years. If you like the sound of it, you might want to take a look at Confluent. Confluent helps companies analyze data on the move by managing an open source project that is notoriously challenging and difficult to scale in business.
Apache Kafka allows companies to analyze data in real time, which is very important for almost any business. Eighty percent of the Fortune 100 use Kafka in part of their business, but it is very difficult to scale Kafka into an entire organization. Confluent acts as Kafka’s manager, extending and managing the open source platform to be used across the business.
What makes Confluent such an outstanding pioneer in the space is that its founders were the same developers who created Kafka, so no one in the industry knows Kafka better than Confluent. When dealing with core services such as Kafka, the company may want to have the best managers in the industry, making Confluent a better choice. This has resulted in an excellent financial performance for the company. Since the fourth quarter of 2019, the company has grown its revenue sequentially, and in the third quarter of 2021, Confluent grew its top streak 67% year-over-year to $103 million.
The company is spending a lot now so that it can grow in the future. Confluent spent $47.7 million in research and development expenses and nearly $87 million in sales and marketing in the third quarter in hopes that it can capture a greater market share in its fast-growing industry. By 2024, Confluent expects that chance to nearly double, to $91 billion. With an impressive leadership team and spending to succeed in this market, I believe Confluent can see huge success over the coming years as its industry grows.
Make law enforcement more efficient
Trevor Jenwin (Axon Corporation): Axon’s mission is to protect life. Formerly known as Taser International, it is still the leading global manufacturer of conductive electrical appliances (such as Tasers). But in recent years, Axon’s portfolio has expanded to include an ecosystem of connected sensors (for example, body-worn cameras, dash cams, and aerial cameras mounted to drones) and cloud-based software.
Here’s how it works: Axon sensors feed video data to Axon Evidence, a cloud-based repository that improves law enforcement efficiency by simplifying evidence storage. Similarly, Axon Records uses video evidence and artificial intelligence to simplify the report writing process, reducing the time officers spend on administrative tasks. In addition, Axon sensors feed information to Axon Respond, a real-time operational outreach program that helps dispatchers, first responders, and law enforcement personnel collaborate, monitor actions in the field, and make data-driven decisions.
Why invest in Axon? Due to its early success in the Taser industry, the company has relationships with 94% of US law enforcement agencies, and Axon has leveraged those relationships to cement its position as the market leader in body-worn cameras and software. This has translated into an impressive financial performance over the past year.
Axon sales rose 39% to $872 million, gross margin expanded 410 basis points to 62.8%, and software revenue held 119%, which means a 19% increase in average spend per customer. Axon remains unprofitable under GAAP, posting a loss of $21 million over the past 12 months. But the company generated free positive cash flow of $103 million, which is indicative of the sustainability of its business model.
Axon still has plenty of room to grow. Management recently adjusted its steerable market to $52 billion, up from $27 billion. The updated figure highlights Axon’s potential in two new markets: consumer safety and justice software. The company is already implementing this opportunity. In December, Axon introduced the Attorney Premier System, the first digital evidence system for prosecutors and defense attorneys. The platform simplifies workflows for legal teams, helping clients organize, review, and share evidence more efficiently.
Shareholders should expect great things from Axon in the years to come. This is why this explosive growth stock seems like a smart buy right now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.