It has been a year like no other. Many false starts and stops for the economy have been caused by the Pandemic. The S&P 500 has gained 25% so far this year, but many subsectors of the market haven't been as fortunate. Many high-flying growth stocks have taken it on the chin and have lost a significant portion of their value.
With that in mind, let's look at three companies that have all the ingredients for continued success: leadership in their respective fields, significant secular tailwinds, and large, unaddressed markets that could make them among the most successful stocks of the coming year.
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1. Fueling gaming, data centers, and the metaverse is what Nvidia is doing.
No company has a candle to Nvidia when it comes to graphics processing. It pioneered the graphics processing unit and has been the industry leader for a long time.
The market for desktop graphics cards has a huge share of it's own. Its gaming segment grew by over 75% in the first nine months of the year, thanks to its cutting-edge processors.
The company's addressable market has grown significantly in the last few years due to the advent of cloud computing and artificial intelligence. Every major cloud operator uses Nvidia's lightning-fast GPUs for training and running artificial intelligence. The data center revenue has increased by over 50% so far this year.
Last year, the company generated revenue of $16.7 billion, which is less than the opportunity. The magnitude of the opportunity that remains is illustrated by the fact that the addressable market will total $250 billion by 2023.
The metaverse will add a $10 billion opportunity over the next five years, thanks to its processors.
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2. The future will be streamed.
Over the past several years, Roku has become the leading platform for accessing streaming services, beating out Amazon's Fire TV at its own game. The company has gone beyond its name and created a smart TV operating system called the Roku OS, which it licenses to a growing number of connected-TV manufacturers.
The company gets a cut of every new subscriber who joins a paid streaming service from the home page. It charges each of the ad-supported streaming channels a flat rate of 30% of the advertising inventory streamed on its platform, which it uses for targeted advertising. All of the ad revenue from The Roku Channel goes to the company.
The company's platform segment is booming because of this revenue and licensing from the Roku OS. platform revenue grew 99% in the first nine months of this year
Sales of its player segment declined, but it still sells these devices at or near cost to bring viewers into its growing network. A greater selection of programming attracts more viewers, which in turn leads to more channels and ad revenue.
Since they get more bang for their buck, ad executives are moving broadcast advertising budgets to streaming. A study last year found that while 29% of television viewing occurs on streaming services, just 3% of TV ad budgets are spent there. As these ad dollars find their way to streaming, Roku is uniquely positioned to reap the windfall.
The addressable market is expected to top $769 billion by the year 2024. The amount of revenue it generated last year was just $1.78 billion.
Fair-weather investors became concerned about the slowing of account growth and streaming hours in the most recent quarter. It isn't surprising that this happened at the same time as the easing of restrictions on summer vacations. Roku stock will likely move higher once investors realize the error of their ways.
Forewarned is forearmed.
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3. The next generation of digital advertising is being enabled by The Trade Desk.
The Trade Desk is in a league of its own when it comes to programmatic advertising. The company pioneered a state-of-the-art system that uses high-speed computers and sophisticated algorithms to automate the buying of digital ads in real time. Each second, the platform can evaluate 12 million ad impressions and quadrillions of permutations.
The Trade Desk has established a broad coalition of companies that have adopted its Unified ID 2.0, which is largely viewed as the replacement for ad-tracking cookies, which are swiftly being shown the door.
The Trade Desk's customer retention rate has remained above 85% for the past seven years, as shown by the fact that marketers tend to stick around once they become a customer.
Digital advertising is expected to grow at twice the rate of the ad industry. The Trade Desk's bread and butter is expected to climb 29%. The Trade Desk's revenue growth rate leaves them both of those industry-wide figures in the dust, with sales soaring 55% during the first nine months of this year. The company is stealing market share from the incumbents. Net income at The Trade Desk grew by 41%, making it a profitable stock.
The Trade Desk generated $836 million in revenue last year, which is a drop from the previous year. The global ad industry is expected to hit a billion dollars this year.
Data by YCharts.
The icing is on the cake.
There's another reason to act if the criteria weren't enough. The recent rotation out of technology stocks has made each of these companies cheaper on a relative basis. At the time of this writing, The Trade Desk, and Roku are all selling for less than their recent highs.
That's not the only thing. Each of these stocks has crushed the broader market over the past three years, due to stellar execution and the advantages. They will continue to perform better over the long term.
Isn't that what every investor is looking for?
