It has been, without question, a fantastic year for technology stocks. Even as many of them felt a bit of pain as COVID-19 hit and the market tanked, most—if not all—of our top tech stocks have come roaring back to life. They have seen huge gains, both year-to-date and year-over-year.
So, what does this tell us about tech stocks? And how can investors profit from that information?
The first thing to note is that this is yet more evidence supporting the idea that tech stocks are perhaps the most resilient opportunities on the market right now. Or at least, the most resilient as it pertains to outside market forces.
While tech stocks are vulnerable to competition from one another—or to disruption (Silicon Valley’s favorite word) via innovation from the outside—overall, things like trade wars and massive economic slowdowns have really had little long-term effect on tech stocks.
There are myriad reasons why that is, but here are the most important ones: the adaptability of the tech business model and the fact that tech stocks are so focused on the future.
The first factor is pretty straightforward: tech companies are not often bound to a single country, supply chain, or office building. Working from home has never been easier, and for massive tech companies, it wasn’t too difficult of a switch.
On top of that, things like slowdowns or even shutdowns in major parts of the supply chain have been pretty easily navigable, due to the amount of options for production that await at the moment—and the obscene profit-to-production ratios these companies operate on.
For instance, consider that it costs Apple Inc. (NASDAQ:AAPL) relatively little to make each “iPhone,” compared to its huge sale price.
Of course, if that production cost were to rise, it would hurt profits somewhat. But the company makes so much money per iPhone sold that it wouldn’t be unthinkable to make a transition to a slightly more expensive production cost (should the situation demand it).
This isn’t a business with razor-thin margins like restaurants; tech has a lot of breathing room in this regard.
The second important factor is that tech companies are by their nature forward-looking. What this means is that a company is often valued not on its profits today, but on its promise of profits tomorrow.
That can be seen in numerous tech giants often losing money for years, only to continue to raise capital and see their share values grow, on the belief by investors that the company will one day turn a profit.
Sometimes it pays off big—Amazon.com, Inc. (NASDAQ:AMZN) being perhaps the most famous example—and sometimes it ends up being a dud. Either way, the current market conditions are at times functionally irrelevant to the future promise of many tech companies.
Of course, that protection does have its limits. Sometime truly catastrophic and unthinkable events, like a global war, would be enough to derail these companies, but now we’re talking Black Swan territory. The thing about Black Swan events is that, by their nature, you cannot plan for them.
But lesser-degree Black Swan events, like a global pandemic, have been shown to have little effect on the overall fortunes of the top tech stocks in 2020.
And all this brings us to how you can profit from this information: play the long game.
My investment strategy is to keep the future in mind and invest in companies that promise to see gains not just in the present, but for a long time to come. The reason I value that investment strategy is precisely because of things like COVID-19. Day-to-day fluctuations and market conditions are unpredictable and volatile, whereas long-term trends are far easier to see.
It’s why investors over the past several years have profited from stocks like Tesla Inc (NASDAQ:TSLA), Netflix Inc (NASDAQ:NFLX), NVIDIA Corporation (NASDAQ:NVDA), Apple Inc., and select marijuana stocks.
Top Tech Industries
Now that we understand why I love tech stocks so much, let’s take a further dive into my top three tech stocks of 2020 (and beyond).
Chart courtesy of StockCharts.com
Tesla stock, Netflix stock, and NVIDIA stock have all seen huge gains year-to-date, with their individual successes reflecting where they are in their respective growth cycles.
Tesla Inc, of course, is a huge player in an emergent industry that is just starting to take off: renewable energy. The company is at the forefront of green tech and autonomous vehicles, putting it in an enviable position to dominate the market as we progress toward a zero-emissions world.
TSLA stock, as a result, is the most volatile of the three aforementioned stocks, but also the most potential-filled. The company has the opportunity to become one of the largest in the world if it becomes not only the global leader in electric vehicles, but is also able to fulfill its promise to produce and distribute solar-powered batteries to homes around the planet.
As such, it may not be the safest investment on the market, due to its volatility and status as an emergent-industry stock, but overall I believe that Tesla stock will be seeing massive gains—with the occasional hiccup along the way—for years to come.
Next, NVIDIA stock represents a unique opportunity: to get in on the booming artificial intelligence (AI) sector while also having a stable foundation of recurring revenue in the present.
NVIDIA Corporation profits, at the moment, mainly from selling computer processing chips to gamers and other customers. But it’s also focused on producing computer processing tech that will be the brainpower of the AI industry. Considering that AI could be a trillion-dollar industry within the next few decades, it makes sense that NVDA stock is so highly valued.
Better yet, considering that the company is already well positioned due to its dominance in the gaming sector with its computer processing chips, it has near-future gains likely locked up. With NVIDIA partnering with Tesla to power the electric vehicle maker’s autonomous driving systems, you have an easily predictable path of gains year-over-year, potentially for decades to come.
My third top tech stock in 2020 is one that is at the end of its early growth cycle. But that shouldn’t ward off investors; Netflix stock is still looking to remain dominant in the streaming space.
While many other streaming services have popped up in recent years, none of them have made a dent in Netflix Inc’s growth rate. At the end of the day, even rivals with infinitely deep pockets, like Apple Inc and Walt Disney Co (NYSE:DIS), have yet to produce a streaming service that can rival Netflix in the depth of its programming and in the cultural touchstone status of its programs.
What I mean by that is that we have yet to see any rival streaming service produce a must-see show, while Netflix has produced many over its lifetime. Frankly, at the moment, the company is just better than Walt Disney Co, Apple Inc, and Amazon.com, Inc at creating a desirable streaming service that appeals to a wide, global audience.
Couple that with the fact that many people have been growing up with Netflix being the primary way to consume shows and you have a massive, global pool of customers from which to draw recurring revenue from, for years to come.
You’re never going to regret betting on the sun rising tomorrow. In other words, the future is inevitable. Progress is inevitable. New tech is also inevitable.
That inevitability has made tech stocks among the most stable and profitable in the current market. They have made many investors very happy over the years.
The simple fact is that 2020 has been dominated by tech stocks, and there’s no reason to think that this will change in 2021, 2022, 2023… you get the picture.