The past few years have been marked by rapid technological change, with many tech stocks delivering impressive gains. And while the excesses of the 1990s tech boom-and-bust are still fresh in many investors' memories, today's tech stars, by and large, produce significant revenue and profits, in contrast with the many pretenders of that prior period.
While several outperformers are large, well-known consumer brands, some lesser-known tech names have also established leading positions amid massive paradigm shifts. Here are three market-beating tech stocks to consider, and the megatrends they're riding.
These three companies are showing explosive growth. Image source: Getty Images.
1. Micron
Megatrend: Computing everywhere.
Trailing 12-month returns: 128%
Micron (MU -2.45%) is a leading producer of several types of memory, the "nuts and bolts" in virtually every type of storage and/or computer processing device.
The two main types of computing memory are NAND flash and DRAM. NAND flash stores memory "at rest," and retains data even when power is turned off. DRAM is much faster than NAND, but works only with continuous power.
Historically, memory has been a violently cyclical, commodity-like business, with wild pricing swings based on supply and end demand. However, like the airline industry, the memory industry has consolidated over the past decade, and the complexity of making ever-denser chips has changed the dynamic.
Micron is currently one of only three major DRAM producers, and one of five major NAND producers, with about two-thirds of its business in the more consolidated DRAM market.
And on the demand side, the need for computing power is exploding beyond traditional smartphones and laptops, to cloud-computing data centers, tech-heavy industrial equipment for the Internet of Things, and self-driving cars. It's also worth noting that these demands feed on one another. For instance, as cars collect and process more data on the road, that data is also likely shared with a cloud data center. Therefore, it's no surprise Micron's stock has skyrocketed as much as it has over the past year.
2. Arista Networks
Megatrends: Software-defined networking; cloud computing.
Trailing 12-month returns: 130%
Arista Networks' (ANET 0.19%) meteoric rise in 2017 can be attributed to its leading position in software-defined networking for data center switches, products which have been in high demand due to the rise of cloud computing.
Across all sorts of industries and enterprises, IT teams are increasingly choosing to shift their data and applications from a private data center and into large public clouds. IT research firm Gartner (NYSE: IT) estimates the cloud computing market will total roughly $260 billion in 2017, good for 18.5% growth over 2016.
Public data centers require massive amounts of networking equipment in the form of switches, which have traditionally been expensive. However, recent technological advances have moved much of the functionality in switches to software, rather than the more interconnected hardware-and-software combinations of the past.
Arista Networks jumped on the trend early, investing over 1,000 man-years of work on 10 million lines of code in its EOS operating system. The emphasis on the operating system software allows Arista to make switches out of "merchant" hardware components from other low-cost vendors, which enables it to produce high-performing switches for significantly lower costs than traditional vendors such as Cisco (NASDAQ: CSCO).
As large cloud players build out their data centers at massive scale, price-performance characteristics are paramount. And it's no surprise that Arista's stock has rocketed as a result.
3. MuleSoft
Megatrend: Application programming interfaces.
Returns over 2017 IPO price: 98%
MuleSoft (MULE), went public in March of 2017, and has already proved itself to be a standout. The company is the innovator behind the Anypoint Platform, a new type of IT layer called the application network. Using Anypoint, companies can more easily stitch together various databases, applications, and devices into new enterprise applications.
Traditionally, stitching together various data resources has been a cumbersome, manual, and expensive task. MuleSoft's technology, however, allows data sources to be displayed as an application programming interface (API). An API is essentially a virtualized version of another data source. This video from MuleSoft portrays an API as a "waiter" that retrieves data from another source upon command.
MuleSoft's technology turns these data sources into "pluggable" APIs, which can very easily (and cheaply) be composed and built into new applications.
Anypoint has the potential to greatly improve an enterprise's speed of innovation while cutting costs, and MuleSoft's customers are increasingly embracing the technology; MuleSoft posted 60.3% revenue growth last quarter, and management forecasts a whopping $1 billion in revenue by 2020, up from just $296 million in 2017.
While the past year has been very kind to these three names, the megatrends they're riding aren't slowing down anytime soon. Growth investors should take note.
