No matter what the broader economy is doing, there are always opportunities to make money in the technology sector. These companies have the innovative bent that spawns new products and services that can disrupt whole industries and lead to market-beating returns.
We’ll look at three tech stocks that appear to be good buys today. Booking Holdings (NASDAQ:BKNG) and Alibaba Group (NYSE:BABA) are established players but still have plenty of opportunity to take market share in their respective markets of travel and e-commerce. Farfetch (NYSE:FTCH) completed its initial public offering (IPO) in 2018 and is using its online platform to shake things up in the $300 billion personal luxury goods market.
1. Booking Holdings: A dominant travel services provider
Booking Holdings (formerly known as Priceline) is the largest online travel service in the world. Its various brands, including Booking.com, KAYAK, Priceline, agoda.com, Rentalcars.com, and OpenTable, serve customers and partners in more than 230 countries.
The shift in travel spending from offline to online has been a huge tailwind for the company. Booking.com is the company’s largest brand, which included accommodations for more than 2 million hotels, apartments, and other bookable properties in 2018.
The engine to the company’s growth is marketing. Last year, the company spent $4.4 billion on marketing expenses, which mostly went to online search engines it works with. The wide availability of bookable properties coupled with a big advertising budget allows Booking Holdings to land top search results and maintain its leadership position in the online travel market.
The opportunity here is centered around taking market share in a multitrillion-dollar travel industry. Travel is a growth industry, but Booking Holdings is expanding much faster. Total spending on travel and tourism worldwide is expected to grow at a low-single-digit rate. However, Booking Holdings has seen its revenue increase by 77% in total over the last five years.
There is still plenty of opportunity in the industry for Booking Holdings to maintain its momentum. Management has positioned the business to capture more growth in China over the decade. Last year, Booking made a $500 million investment in Didi Chuxing, a leading mobile transportation and ride-hailing platform in China. Booking also made a $200 million investment in Grab, a leading on-demand transportation and mobile service platform in Southeast Asia. The strategy here is to cross-promote its bookable properties with users of these transportation services.
The stock currently trades for a forward price-to-earnings ratio of 16.9 times next year’s earnings estimate, and analysts expect earnings to grow at 12% per year over the next five years.
2. Alibaba: A dominant Chinese tech giant
Chinese tech giant Alibaba proves every quarter why it’s one of the best tech stocks to consider if you’re looking to juice your returns. Revenue increased by 40% year over year in the most recent quarter. The largest revenue driver is the company’s widely used commerce platform, including Taobao and Tmall, which has a growing base of 693 million annual active users and 785 million active users on mobile.
Alibaba doesn’t make or sell anything. It generates most of its revenue from digital ad services, which help merchants connect with consumers through the company’s e-commerce marketplaces. Alibaba basically has a toll-booth monopoly on foreign brands that need to reach Chinese consumers. Some of the biggest brands, including Apple and Nike, rely on Alibaba’s Tmall to sell their goods in China.
These e-commerce platforms generate high profit margins, which management uses to invest in other growth initiatives. There is Alibaba Cloud, the largest cloud service provider in China, which reported revenue growth of 64% last quarter. Alibaba is also investing in new retail concepts like its Freshippo supermarkets, which is blending the online and offline shopping experience in innovative ways.
The overarching mission of Alibaba is to “make it easy to do business anywhere.” Management sees a long runway of growth. The goal is to serve 1 billion consumers and double gross merchandise volume on its commerce platforms by fiscal 2024 (which ends in March). Given the company’s current momentum, there’s every reason to believe Alibaba will reach those targets.
3. Farfetch: Looking to dominate the global luxury goods market
The luxury goods market was valued at $307 billion in 2018 and is expected to grow to $446 billion by 2025, according to management consultancy company Bain. The problem for luxury brands is that there are a lot of them, and the shift to e-commerce is making it more difficult for smaller brands to stand out. Farfetch is in business to solve that problem. The company has 1.9 million active users and more than 1,200 brands and boutiques selling on its platform.
Brands are attracted to the platform because it simplifies the process of fulfilling orders. Farfetch offers a range of services, including fulfillment, marketing, payments, and other tools to help brands grow their businesses.
The attractive aspect of Farfetch’s business is that it doesn’t carry a lot of inventory relative to traditional luxury goods companies. This makes Farfetch appealing to investors for its relatively asset-light business model, which should lead to plenty of profits as the business scales.
The long-term vision of founder Jose Neves is to reinvent how people discover and shop for luxury goods. The recent stellar growth trend in gross merchandise volume (GMV) shows that Neves is on to something big. On a currency-neutral basis, GMV increased by 40% year over year in the third quarter. This is a deceleration from 50% growth in the first quarter due to a promotional sales environment, but as those growth rates reveal, the long-term opportunity is massive relative to the company’s $2.9 billion market cap.
Profits are nonexistent at this point, but this shouldn’t concern investors at this early stage of growth. The third quarter revealed a year-over-year improvement in EBITDA (earnings before interest, taxes, depreciation, and amortization) margin, as management continues to guide the business to profitability. As the company reaches more consumers and expands the inventory selection on its marketplace by bringing in more brands, the benefits of scale will kick in, and costs should come down.
The stock has fallen dramatically over the last year, but it was richly valued coming out of the IPO about a year ago. If Farfetch can convert its inventory-light business model to a double-digit operating margin over time, the stock’s current price-to-sales ratio of 3.5 could be undervalued.