Movie theater chain AMC Entertainment Holdings has seen its share price rise astronomically high, gaining more than 2,600% since the beginning of this year.
Those share price gains are enough to get any investor's attention, but the problem with this rise is that it's been fueled purely by investors on Reddit's WallStreetBets message board, and not from the company's growth or long-term opportunities.
So we asked a few Motley Fool contributors for tech stock ideas that have the potential for share price gains that can easily beat the market and that have strong underlying businesses. They came back with Zoom Video Communications (NASDAQ:ZM), Roku (NASDAQ:ROKU), and The Trade Desk (NASDAQ:TTD). Here's why.
Image source: Getty Images.
Remote work is here to stay
Brian Withers (Zoom): Zoom Video Communications has become a household name over the course of the pandemic. Its easy-to-use software attracted millions of consumers and businesses that now depend on its video platform that "just works." Even as employees head back to the office, many will adopt hybrid work situations, earning virtual meetings (and Zoom) a permanent place in our daily lives.
Investors might be thinking this is just a "pandemic stock" and its shares will get crushed once growth slows down. The latest quarterly results show otherwise. Not surprisingly, the year-over-year results are stellar, but what's telling is the change over sequential quarters. Revenue gained 8% from the fourth quarter to the first quarter. Large customers generating more than $100,000 in revenue grew 22% over the same period. Remaining performance obligations, the sum of all contract values not yet received, grew 18%. All three of these metrics show that even as the pandemic wanes, this platform is still capable of strong growth.
|
Metric |
Q1 FY2021 |
Q4 FY2021 |
Q1 FY2022 |
Change (QOQ) |
Change (YOY) |
|---|---|---|---|---|---|
|
Revenue |
$328 million |
$883 million |
$956 million |
8% |
191% |
|
Customers generating >$100K in TTM revenue |
769 |
1,644 |
1,999 |
22% |
160% |
|
Remaining performance obligations |
$1,068 million |
$1,751 million |
$2,073 million |
18% |
94% |
Data source: Zoom Video Communications. Note: Q1 FY2022 ended April 30, 2021.
But what should have investors even more excited is the opportunity for its Zoom Rooms product. This product is a combination of Zoom software and inexpensive hardware setups that make it easy to convert an in-person-only conference room to a hybrid one. As businesses move to accommodate a hybrid workplace with a much larger portion of their staff working remotely, these solutions are just the ticket.
Image source: Zoom Video Communications.
Even if you are excited to head back to the theaters to catch a movie this summer, as an investor, AMC is not where you should put your hard-earned savings. You would be much better off buying shares of an innovative growth company that will be a permanent fixture for the workplace of the future. Why not pick up a few shares of Zoom today? Your future self will thank you.
Image source: Getty Images.
The future will be streamed
Danny Vena (Roku): Some investors have shortened their outlook in recent months, focusing on the pandemic recovery and buying up meme stocks like AMC. Experienced investors will recognize that limiting their investing timeframe to months instead of years can be a mistake, which could ultimately dent your overall returns. That's why I believe Roku is a better long-term buy.
Viewers are ditching cable faster than ever before. More than 5.1 million subscribers cut the cord in 2020, up from 4.9 million in 2019 and 1.6 million in 2018. In fact, since the peak in early 2012, the industry has shed more than 16 million subscribers, with no end to the exodus in sight.
Where do all these viewers go when they cut the cord? The vast majority turn to streaming video to fill the void. That's where Roku comes in. The company is the leading aggregator of streaming apps, providing access to more than 10,000 channels -- subscription and ad-supported services alike.
Not only does Roku have the widest assortment of viewing channels available, but it also makes it a snap to access its platform. In addition to its set-top boxes and dongles, the company built a connected-TV operating system (OS) that's the No. 1 selling smart TV OS in both the U.S. and Canada, found in 38% and 31% of connected TVs sold, respectively. This strategy has been so successful, Roku is using it to expand internationally, and has forged agreements with TV manufacturers in Brazil, the U.K., and Mexico. More countries are sure to follow.
There's a common misconception that Roku makes the lion's share of its revenue from the sale of its streaming devices, but that simply isn't the case. Digital advertising is the company's biggest breadwinner, as Roku takes roughly 30% of the advertising space on channels that appear on its platform.
Revenue from its platform segment -- which includes digital advertising, The Roku Channel, and the licensing of its OS -- generated 81% of the company's sales in the first quarter. It's also Roku's fastest-growing segment, with revenue up 101% year over year.
Other metrics show the company is firing on all cylinders. Roku's active accounts grew 39% in 2020, even outpacing the growth of Amazon's Fire TV, which slowed to 25%. Roku now boasts 53.6 million active accounts with higher engaged users, which pushed streaming hours of 18.3 billion up by 49%. That amounts to nearly 3.8 hours per account per day. Roku's average revenue per user is also climbing steadily, up 32% to more than $32.
Given its massive tailwinds, seamless execution, and growing opportunity, it's easy to see why Roku is a great buy for the long term.
Image source: Getty Images.
A smart advertising play
Chris Neiger (The Trade Desk): While AMC's stock price rise has been hard to ignore, there's essentially nothing in the company's underlying business to justify it. If you're a long-term investor looking for impressive gains and a strong business, then The Trade Desk is your stock.
The Trade Desk's share price has skyrocketed more than 560% over the past three years as the company has successfully tapped into the fast-growing online advertising market.
The Trade Desk's platform helps companies put ads on the internet, mobile devices, and connected TVs. This last segment is one of the company's biggest opportunities as advertising on connected TVs is expected to increase by more than 60% between now and 2024.
Connected TV viewing is becoming increasingly popular among advertisers because of the vast amount of time people spend on them, compared to other devices. A recent report showed that connected TVs made up 49% of worldwide viewing time compared to just 10% for mobile phones and 5% for tablets.
And not only is The Trade Desk tapping into this growing advertising trend, but the company is very popular with its current customers, as the company boasts a 95% retention rate for its clients -- for seven years running.
Over the past month, the company's share price has taken a hit, falling more than 20%. But nothing has changed with the company's underlying business. This drop has created a nice buying opportunity for investors who want a fast-growing tech stock but also like a bargain.
I get the appeal of AMC's stock as investors look for ways to quickly build wealth, but skyrocketing share prices aren't the only thing investors should be looking for. A solid business with lots of room to grow is foundational to investing for the long term -- and The Trade Desk fits the description perfectly.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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