Heading into 2020, technology was not exactly a universally beloved sector of the economy. Silicon Valley giants like Facebook (NASDAQ: FB) and Amazon (NASDAQ: AMZN) were being attacked for censorship and monopolism from both sides of the political aisle — and many investment analysts considered them very overvalued.
Then an unforeseen pandemic ravaged the world, killing hundreds of thousands of Americans and throwing tens of millions out of work.
Those numbers are grim, to be sure. But it’s worth noting that they’re not nearly as bad as some of the pessimistic predictions from the spring, which forecast millions dead and a persistent double-digit unemployment rate.
There are two sectors of the economy we can thank for helping to avert this doomsday scenario. One, of course, is health care — and the other is technology.
Many of the same companies we were lambasting last year for their lofty valuations, anticompetitive practices, and political shadiness have played essential roles in the work-from-home economy this year. This author has ordered groceries on Amazon Fresh and video-chatted with friends and family on Facebook Messenger dozens of times since March.
With the benefit of hindsight, we can now say that those early 2020 valuations weren’t too high after all. Some might have even been too conservative.
Of course, not every part of the technology sector has been as investable as every other part in 2020. Mobility companies like Lyft (NASDAQ: LYFT) have not shared the gains of video conferencing companies like Zoom (NASDAQ: ZM) during the pandemic.
So which tech stocks are set to outperform in 2021?
We can’t say for certain — we never know when the next hypercontagious virus is going to emerge, after all. But our research team has been monitoring seven technology investing trends that are already gaining momentum…
Chinese EV Upstarts Challenge Tesla
We can all name one thing that suddenly exploded out of China with no warning this year.
But another much more positive development from the world’s most populous country was the rapid rise of its electric vehicle (EV) industry.
Four Chinese EV firms — Li Auto (NASDAQ: LI), NIO (NYSE: NIO), Xpeng (NYSE: XPEV), and Kandi Technologies (NASDAQ: KNDI) — have captured the interest of investors worldwide by posting impressive returns in the last month. As you can see, all have also pulled back recently. We’ll discuss why in a moment.
China is the world’s largest EV market, even though only 5% of the country’s total auto sales are currently electric. Its government is aiming to boost that proportion to 25% by 2025 — and it certainly has the resources to meet that goal. China has controlled much of the EV battery supply chain for years, and now its companies are starting to produce the cars themselves.
The November rally in Chinese EV stocks was driven by general EV bullishness surrounding Tesla’s (NASDAQ: TSLA) S&P 500 inclusion and President-elect Biden’s victory. It came to a swift end, however, after the National Development and Reform Commission of China launched a nationwide review of e-mobility projects on November 26.
While somewhat concerning, this review appears to be focused on a specific corruption investigation into two property developers and should not herald the end of China’s EV industry. In fact, it could serve as a buying opportunity for certain Chinese EV stocks.
Li Auto and Xpeng, with their low debt burdens and relatively low price-to-book-value (P/B) multiples, appear to our researchers to be the best “buy the dip” selections.
Buy Li Auto (NASDAQ: LI) and Xpeng (NYSE: XPEV) at market.
The Return of Quantum Computing
One technological idea that has popped up intermittently over the last few decades has been “quantum computing.” That’s the deliberate use of exotic phenomena in particle physics, such as quantum entanglement and quantum superposition, to perform complex computations far faster than regular computers can.
Until recently, quantum computing was an almost completely theoretical technology with little real-world applicability. But then, in October 2019, Alphabet (NASDAQ: GOOG) announced that it had achieved “quantum supremacy” with its quantum supercomputer, Sycamore.
Sycamore had successfully performed a calculation in 200 seconds, which no classical computer could complete in any feasible amount of time. Researchers estimated that a state-of-the-art classical supercomputer would have taken 10,000 years to complete the same one.
This technological milestone likely would have made waves at this year’s biggest quantum computing conferences, like Lisbon’s International Conference on Quantum Communication, Measurement, and Computing in June or Albuquerque’s Adiabatic Quantum Computing Conference in September.
It likely would have signaled to the engineering community that real-world applications of quantum computing aren’t as far off as they once appeared. And it likely would have generated renewed interest in quantum computing among investors.
But it didn’t — because the vast majority of this year’s quantum computing conferences were canceled due to COVID-19.
Some conferences are holding special makeup sessions this winter, while others are simply attempting to cram their canceled 2020 content into their regular summer 2021 sessions. Regardless, the first big post-supremacy quantum computing conferences are coming up in the next few months — and should drive a renaissance in this frequently overlooked field.
Alphabet obviously has substantial quantum computing exposure — but Sycamore hardly makes up a substantial portion of its business. Investors who are willing to take on some risk in pursuit of a “pure play” should consider 180 Degree Capital Corp. (NASDAQ: TURN).
180 Degree Capital is an investment concern with substantial quantum-related holdings. Its largest investments include D-Wave Systems, a cloud quantum computing startup, and Nanosys, a manufacturer of quantum dot displays.
While speculative, it has been beaten down to a comfortable P/B ratio and price-to-owner-earnings ratio after years of underperformance. And that low valuation should prime it for outsize gains when interest in quantum computing returns next year.
Buy Alphabet (NASDAQ: GOOG) and 180 Degree Capital Corp. (NASDAQ: TURN) at market.
Gig Economy and Work-From-Home IPOs
Now that COVID-19 vaccines are on the way, the pandemic is unlikely to continue over the next few years — at least not at its current level of intensity.
But research suggests that the increased prominence of “gig economy” jobs and work-from-home arrangements is probably here to stay.
A study conducted in June by George Mason University and The Wellbeing Lab found that less than 25% of American workers feel positive about returning to their offices, while a 2011 study published in the International Entrepreneurship and Management Journal found that self-employment generally increases following recessions.
Fortunately for investors, the coming year will see two hotly anticipated initial public offerings (IPOs) that are extremely relevant to the newly expanded work-from-home and gig economies: Airbnb and Monday.com.
Home rental platform Airbnb has been a popular source of income for the out-of-work — and a popular way to find remote getaways among wealthy Americans fleeing COVID-19-ravaged cities. It recently reported revenue of $1.34 billion for the third quarter of 2020 — its second-most-lucrative quarter on record.
Team management software startup Monday.com provides a suite of Asana-like task management services that help businesses manage employees who are working from home. Its revenues have grown from $50 million in 2018 to $120 million in 2019 — and they’re expected to top $200 million this year.
Both IPOs are expected to take place between December and next summer.
Check out IPO Authority for the latest intelligence on the Asana and Airbnb IPOs.
The 5G Rollout Marches On
It is difficult to overstate the transformational effect ubiquitous 5G mobile data service will have on the internet.
The souped-up wireless service uses a distributed network of “small cell” towers to provide connectivity that is far faster and more consistent than 4G — and many times faster than even the vast majority of residential broadband offerings from cable companies like Comcast (NASDAQ: CMCSA).
In other words, 5G is primed to become our dominant method of connecting to the internet — and it’s rolling out faster than most investors realize.
Telecommunications firms like Verizon (NYSE: VZ) and T-Mobile (NASDAQ: TMUS) have already turned on their 5G networks in many major American cities — and their stock prices have run up substantially in recent years on 5G-related excitement.
Fortunately, there’s another way to play the 5G rollout, one which sports more reasonable valuations and provides more consistent income than the big telecoms: cell tower real estate investment trusts (REITs).
American Tower Corp (NYSE: AMT) and Crown Castle International Corp (NYSE: CCI) are two of the largest wireless communications infrastructure owner-operators in the world. Together, they own more than 200,000 towers globally.
Both have remained steadily profitable in 2020 despite the COVID-19 pandemic, and both sport generous dividends. Crown Castle’s yield sits at 3.19% at the time of writing, while American Tower’s yield is currently at 1.99%.
The shift away from conventional cell towers and toward 5G small cells should keep both firms flush with cash as they build new facilities and retrofit old ones for their telecom customers. American Tower’s CEO recently remarked that the introduction of 5G will represent a big building opportunity for AMT because it will require cell towers to be closer together.
Both of these cell tower REITs have plenty of room to run heading into 2021.
Buy Crown Castle International (NYSE: CCI) and American Tower (NYSE: AMT) at market.
How Long Will the New Crypto Bull Market Continue?
On December 17, 2017, Bitcoin hit an all-time high above $20,000 after a year of dizzying gains.
It then proceeded to lose more than 80% of its value over the next year, settling at a low just above $3,100 the following December.
Today, however, Bitcoin seems to be back. It passed the $18,000 level in November for the first time since 2017 and is up by triple digits this year (as is fellow cryptocurrency Ethereum).
Will this new rally continue into 2020?
It’s hard to say. Now that the halving of the block mining reward is behind us, Bitcoin’s price action is once again being driven entirely by investor sentiment — which makes it difficult to predict with any certainty.
However, technical indicators seem to show that cryptocurrencies will still have some room to run in 2021. Bitcoin’s Mayer Multiple — its ratio of price to 200-day moving average — is still well below the 2.4 level, which has heralded the end of previous crypto bull markets.
Michael Novogratz, CEO of crypto-oriented investment firm Galaxy Digital, believes Bitcoin could reach $60,000 by January — although he also famously once predicted that it could “easily” hit $40,000 by the end of 2018.
It certainly wouldn't be wise to bet the farm on Bitcoin or Ethereum based only on some positive sentiment and a technical indicator. But investors who have some “play money” lying around should consider picking up some fractional coins to mitigate the risk of missing the next big crypto rally.
Buy Bitcoin and Ethereum at market.
AI: The Future of Big Tech
One of the most difficult aspects of the global struggle against COVID-19 has been accurate modeling of the pandemic.
SARS-CoV-2 is a novel virus whose transmission dynamics are still not perfectly understood — and humans are unpredictable and social creatures who tend to spread germs to each other even when placed under the strictest possible lockdown orders.
As we discussed at the beginning of this report, many expert estimates of the full-year death toll from early 2020 have been wildly inaccurate — but you can’t really blame them.
Weather changes, state policy changes, and the growing availability of treatments and vaccines have made it impossible to perform a back-of-the-envelope calculation about the future course of the pandemic with any precision.
The only way to produce even slightly trustworthy COVID-19 forecasts is with an automated system that is able to update its own internal models as it receives new information — an artificial intelligence (AI) system, in other words.
Machine learning and AI startups have accounted for most of the valuation growth in the CNBC Disruptor 50 index of privately held tech startups this year, with many — like Tempus and C3.ai — turning their focus toward public health modeling.
Historically, NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) have provided reliable pick-and-shovel plays on these sorts of AI gold rushes, as their graphics processing units (GPUs) are used in many of the supercomputers and cloud apparatuses that run AI applications.
What’s more, NVIDIA acquired Mellanox Technologies, an AI-focused computer networking products manufacturer, in April — indicating a possible shift toward AI-oriented product offerings.
Both firms are profitable on an earnings basis and have comfortably low debt burdens.
Buy NVIDIA (NASDAQ: NVDA) and Advanced Micro Devices (NASDAQ: AMD) at market.
Defense Technology: Fewer Tanks, More Drones
Since the election, a somewhat-dubious narrative has emerged about the incoming Biden administration’s defense policy. Investors seem to think a Biden presidency will mean less defense spending, as evidenced by the sell-offs in defense contractors like General Dynamics (NYSE: GD), Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC) in November 2020.
The thesis seems to be that the Obama administration adopted a less openly militaristic posture than the preceding Bush administration, so Biden will be less militaristic than his Republican predecessor too.
In truth, however, the notion that Obama Democrats don’t like defense spending can be debunked by a few seconds of googling. Below you can see that Obama actually increased the defense budget sharply during his first term — and only modestly cut it down to late-Bush administration levels during his second term.
Based on recent history, the total level of defense spending is unlikely to change as a result of President-elect Biden’s inauguration — but the type of defense spending might.
It’s fair to say that the Obama administration was less openly militaristic than the Bush administration, even if it spent about as much on defense overall. The Obama administration tended to eschew ground invasions, naval bombardments, and other flashy, high-impact strikes in favor of a defense policy built on spyware, drones, and other secretive weapons.
It’s worth remembering that the Edward Snowden and Chelsea Manning leaks — which revealed the vast extent of the U.S. government’s digital surveillance and drone-killing programs, respectively — both happened under the Obama administration. And in both cases, the administration refused to change course on these policies despite a public outcry.
In sum, the Biden administration might be bad news for conventional arms manufacturers like Lockheed Martin, but it could be very good news for high-tech defense contractors like Palantir Technologies (NYSE: PLTR), which helped build the National Security Agency's XKEYSCORE spyware.
In fact, Avril Haines, Biden’s pick for director of national intelligence, is a former Palantir consultant.
Israeli drone manufacturer Elbit Systems (NASDAQ: ESLT) provides another pure play on the kind of high-tech defense spending the Obama-Biden administration favored. Elbit also has a very low debt burden and a reasonable valuation on a price-earnings ratio (P/E) basis.
Buy Palantir Technologies (NYSE: PLTR) and Elbit Systems (NASDAQ: ESLT) at market.
Technology was one of the most reviled sectors of the financial markets at the start of 2020. Today, near the end of the year, it’s one of the most appreciated.
Tech companies have provided the infrastructure that has allowed life to continue through this devastating pandemic. And in the process, they have entrenched their positions in the market for years to come.
Bonus 5G Infrastructure Stock
Speaking of infrastructure, there’s one other company we should mention in the 5G infrastructure space. This obscure firm serves as a sort of “tollbooth” to the 5G rollout process; it can collect payments from Comcast, Verizon, T-Mobile, and even the Department of Defense to grant them access to the network.
The Wealth Advisory editor Briton Ryle has spent months tracking this tiny tech firm — and he recently released a presentation explaining why he thinks it’ll be one of the hottest tech stocks of 2021. Learn more here.