By John Manning, International Banker
Following on from our recent piece, “Five Industries in Which to Invest in 2019”, we now turn our attention to some of the most promising individual stocks within those industries. Looking forward to 2019, each one of the five sectors certainly appears to have some winners.
We highlight a couple of the clearest likely gainers for each industry in 2019, which are thus worth seriously considering when conducting investment research.
Financial technology (fintech)
Twitter’s Jack Dorsey founded Square, the current primary focus of which is on helping small businesses execute transactions via a variety of convenient methods. Although starting life with the offering of a simple dongle that businesses could attach to their devices to accept card services at the point of sale, Square has expanded considerably since then. It currently processes payments, extends small business loans and even has a debit-card offering via its Cash App—a handy tool that also allows customers to purchase bitcoin.
2018’s third quarter saw Square record a hefty 68-percent annual increase in adjusted revenue, a 107-percent jump in adjusted EBITDA (earnings before interest, tax, depreciation and amortization) and the sixth consecutive quarter of accelerating revenue. And what’s more, the company has grand plans for further growth. For example, it is looking at the possibility of a savings product offering, as well as allowing users to buy stock using the Cash App.
Having raised its price target for Square to $100 from $75 in August, moreover, Guggenheim Partners has also predicted that the company will generate “substantially higher” subscription and services-based revenue than analysts expect for the end of 2019 and beyond. While some may bracket Square as simply another payment-processing provider, it would seem that the company is developing into so much more.
The payments market represents one of the most promising growth sectors under the fintech umbrella over the next few years. With the smartphone being second nature to Millennials, online payment has increasingly become the standard method used by this generation to conduct numerous financial and banking affairs.
PayPal CEO Dan Schulman recently told CNBC, “If you think about the under-30 generation, the Millennial generation—GenTech, as I call them—they grew up with a screen in front of them. And so they think about everyday processes, like payments, differently than you and I do.”
Indeed, despite being around for so long, PayPal continues to dominate this market. In the third quarter of 2018, there were 254 million PayPal accounts active worldwide, which is 15 percent more than the previous year.
In 2014, it purchased peer-to-peer payment service Venmo and in May 2018 acquired iZettle, a small-business payment platform. And although recent reports of fraud losses concerning the former and an ongoing investigation into competitive practices concerning the latter, investors remain bullish on PayPal.
According to Buckingham Research, “Although there will likely need to be some concessions that could impact deal synergies, we also see positive implications in that the CMA (Competition and Markets Authority) believes the combination of PayPal and iZettle will be dominant in small and micro-merchant acquiring.”
- CyberArk Software
Israeli firm CyberArk develops software-based security products and is a global leader in “privileged access security”—an important layer of information-technology (IT) security to protect data, infrastructure and assets across the enterprise, in the cloud and throughout the DevOps pipeline.
Although not as big as some players in the cybersecurity industry, it would seem this year that CyberArk has managed to keep pace with them—and in some cases, outmatch them. For instance, although it has traded largely sideways over the last few years, its stock price has enjoyed more than 70 percent growth in 2018 alone. The company was also recently named a leader in the 2018 Gartner Magic Quadrant for Privileged Access Management, positioned both highest in execution and furthest in vision.
CyberArk has invested more in sales and marketing this year, which has dramatically allowed the rate of customer acquisition. And they are not just any customers. Several Fortune 500 companies, dozens of US federal agencies and even a European government deal indicates the pedigree of the company.
But while its new customer acquisitions are no doubt impressive, CyberArk continues to generate more than half of its revenues from existing customers. This high rate of repeat business underlines just how well the company has been performing over a sustained period of time, as well as the positive customer feedback.
Currently, CyberArk’s 4,200 clients comprise a whopping 50 percent of the Fortune 500, as well as more than 30 percent of the Global 2000. And with the United States Government planning to increase cybersecurity spending over the next few years, this should also bode well for the company’s future prospects.
Proofpoint specialisesin software as a service to help businesses defend and protect their sensitive data worldwide, as well as in e-mail and data-loss protection. According to Darren Lee, the company’s senior vice president and general manager of Compliance and Digital Risk, “We are an established leader in cloud archiving deployments and are committed to eliminating the burden of managing archiving in-house, streamlining compliance, automating e-discovery and giving our customers complete control of their data.”
Like CyberArk, Proofpoint is by no means the biggest company in the cybersecurity space. But it is currently experiencing a strong growth trajectory, one that is expected to carry on into at least 2019. And also similar to CyberArk, Proofpoint was recently named a leader in the 2018 Gartner Magic Quadrant, but for Enterprise Information Archiving—and forthe seventh consecutive year.
Revenue has surged from $196 million in 2014 to $515 million last year and is being projected to jump to $876 million next year. Revenue growth for each of the last two quarters, moreover, was 40 percent. And with analysts expecting sales to hit $192.92 in the fourth quarter, it would mark a further 32.7-percent annual growth from fourth-quarter 2017.
Given that Proofpoint stock appears to be experiencing a correction towards the end of the year, many analysts see this as a great opportunity to invest in this solid company.
This Canadian-based company undoubtedly represents one of the most promising opportunities in the cannabis space. It has already experienced a rollercoaster ride in the short time since it began trading back in July. By mid-September, Tilray stock had appreciated by a staggering 800 percent, before reversing some of those gains towards the end of the year. Still, by December, it was up by almost 400 percent. And with prices looking to have stabilised towards the end of the year, Tilray now looks to be an attractive option for 2019.
The company was the first to receive approval to provide cannabis oil and flower products to Germany, the biggest cannabis market outside North America. And if it can secure the 912,000 square feet of growing space by the end of 2018 as planned as well as develop much of the 3.8 million aggregate square feet on which it currently sits, Tilray may well be the early winner in the Canadian cannabis space.
Indeed, Barclays has increased its position in Tilray stock in recent months.
- Canopy Growth
Canopy Growth is credited with 2018’s investor craze surrounding cannabis after alcoholic beverage giant Constellation Brands invested a hefty $4 billion in the company, thus indicating that there was nothing stopping big money from entering the space.
Considered as Canada’s first cannabis “unicorn”,the Ontario-based Canopy Growth already has 4.3 million square feet of growing space and aims to boost that to 5.6 million square feet. If accomplished, then an estimated 500,000 kilograms per year of production should be achievable.
And although a considerable stock price decline in the fourth quarter left the company with “only” around 20-percent gains across the year, many believe Canopy will eventually end up as the strongest player in the cannabis industry. Although Tilray benefited from first-mover advantage in selling products to Germany as far as cannabis-oil products are concerned, for instance, the German market constitutes a significantly higher proportion of Canopy’s product revenues—14 percent vs.5 percent for Tilray.
This American company, the name of which is a portmanteau of “cognition experts”, specialisesin manufacturing “machine vision” systems—automated tasks in which vision is normally required, such as automated barcode scanning to sort and separate goods as appropriate. Demand for machine vision is starting to soar, especially given that most companies that are implementing robotics and automation are likely to require some form of this technology.
Ninety-seven percent of Cognex’s revenue is from factory automation, a sector that the company believes will grow by 20 percent per year over the long-term. It currently has zero debt, has experienced solid revenue growth over the last few years and has some of the best operating margins in the industry.
On top of such impressive financials, Cognex is set for strong expansion and is soon likely to be tapping into the logistics market, which the company believes it can grow by 50 percent every year, as well as mobile terminals for barcode scanning and airport baggage handling.
And with the stock price correcting in 2018 after several years of stellar growth, few companies in the robotics industry currently present as strong a case to buy as Cognex.
- Rockwell Automation
Rockwell Automation provides industrial automation and information products and specialises in smart manufacturing systems for various goods, such as textiles and packaged foods. It already boasts an impressive market capitalization of $20 billion. The company also has a growing presence in the flourishing internet of things (IoT) space through its sensors, controls and data-analytics capabilities.
In June, Rockwell partnered with leading computer-software and services firm PTC to launch FactoryTalk Innovation Suite. Powered by PTC, the software suite enables companies to optimise their industrial operations and enhance productivity by providing decision-makers with improved data and insights.
And it’s already proving beneficial for Rockwell by allowing it to utilise the data generated and handled by its control systems more effectively. On the financial side, the partnership was a key factor in Rockwell’s strong annual performance, with the fourth quarter of 2018’s fiscal year seeing net income of $345.9 million, equivalent to $2.80 per share and representing 78 percent growth. The year also saw sales grow by 5.6 percent.
Zacks Investment Research recently upgraded Rockwell from a “hold” rating to a “buy”, setting a $183.00 price objective in October. And Credit Suisse also raised its target for Rockwell in November from $171.00 to $173.00, classing the stock as an “underperform”. With automation starting to generate strongly positive investor sentiment in recent months, Rockwell is among the most solid investments in the industry.
Artificial intelligence (AI)
Few companies have invested more into developing AI and machine learning than Google’s parent company. Some of the most exciting applications that make use of this technology include Google Cloud Platform, the Translate service and even its search engine.
And with subsidiary Waymo currently the leader in the driverless car market—some analysts believe the subsidiary could end up commanding a valuation of $175 billion alone—Alphabet’s AI applications are set to take the company onto even greater heights.
Although Alphabet is already one of the most valuable companies in the world, and therefore may not experience a huge surge in share price like smaller firms, the extensive use of AI in virtually every facet of its business makes Alphabet one of the most convincing AI stocks around.
If you’re familiar at all with the tech industry then chances are you will know about the California-based Nvidia Corporation, which has been designing graphics-processing units for the gaming and professional markets since the late 1990s as well as chip units for the mobile computing and automotive market.
These chips are utilised by virtually every major tech giant, largely for cloud-computing purposes, helping their AI servers process information more efficiently. Amazon, Google and Microsoft—as well as thousands of other companies—all use Nvidia chips, which can process more than 100 times faster than traditional computer chips, to train their AI. The chips also process 125 trillion data points per second, which drastically reduces AI “learn” times from eight days to just eight hours.
The company’s AI chips are also proving useful in helping to guide self-driving cars, including Waymo. Nearly 400 companies working on such transportation use Nvidia products, with the firm’s self-driving supercomputer Pegasus being capable of executing 320 trillion operations per second at just one-fifth of the cost of its nearest rival.
The company’s second-quarter revenue showed an 82-percent jump from selling AI chips and hardware, with AI-related sales accounting for more than 70 percent of the revenue surge. And AI sales now represent 24 percent of the company’s total revenue. As far as AI is concerned, few companies are showing more potential than Nvidia.