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2 Tech Stocks for 2021

The Nasdaq is having its best year in more than a decade with a 40% gain. Two names that have been under consolidation for months and maybe gearing up for another leg higher are Shopify (SHOP) and Fortinet (FTNT).

It's been an incredible thus far for the Nasdaq Composite (COMPQ), with the index having its best year this decade, up nearly 40% year-to-date. This outperformance relative to the other major averages is being driven by a significant weighting in tech names mostly unaffected by COVID-19 and biotech names that have come into favor in a world desperate for a vaccine.

Fortunately, we do finally have a vaccine in place following the Pfizer (PFE) news, but the problem is that it's difficult to find any real value out there among Nasdaq-100 names with the index up so much this year. However, two names have spent much of the year consolidating and digesting their prior uptrends, with both names also sporting incredible earnings growth. These two names belong at the top of investors' shopping lists, with both set to outperform in the new year.

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(Source: TC2000.com)

While Fortinet (FTNT) and Shopify (SHOP) certainly don't have a lot in common, with one being a leader in the Software-Security Space and the other being a massive disruptor in Internet-Retail, they both boast strong annual earnings per share [EPS] growth and continue to grow market share each year. In Shopify's case, the company is set to grow annual EPS by over 1000% this year, with FY2020 estimates currently sitting at $3.45. Meanwhile, Fortinet has already been profitable for years, so it does not have triple-digit growth rates like Shopify.

Still, it's getting set to see an acceleration in annual EPS for FY2020 and what I believe to be very conservative estimates for FY2021. Generally, the best-performing stocks in the US Market are those with leading products or services growing annual EPS at a minimum of 20% per year, and both companies meet these criteria. However, FTNT has underperformed its peers this year while it digests its 70% plus returns in 2019, and SHOP has underperformed the QQQ since August after a monumental rally of over 300% in barely nine months. Let's take a closer look at the two companies below:

Shopify released its Q3 results in late October, and the company's Gross Merchandise Volume [GMV] came in at an astounding $30.9 billion, up 109% year-over-year. This is growth that most investors have come to expect from a small-cap or mid-cap name, not a tech name boasting a $120-billion valuation. Meanwhile, revenues increased 96% year-over-year to $767 million, with a strong performance from both Merchant Solutions and the Subscription Solutions segments driving this growth. However, it's worth noting that a tiny segment that barely moved the needle previously is also gaining a lot of traction.

Shopify Capital lent $252 million to merchants in the quarter across the U.S, Canada, and the United Kingdom. This should add incremental earnings to the company's bottom-line while its main drivers of growth continue to increase at a rapid pace.

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(Source: YCharts.com, Author's Chart)

As shown above, Shopify has one of the most powerful earnings trends in the tech space, with a compound annual EPS growth rate of over 180% ($3.45 vs. $0.15), assuming the company meets its FY2020 estimates.

Meanwhile, FY2022 annual EPS estimates are currently sitting at $5.24, suggesting that the stock could increase earnings by another 50% after lapping what's one of the most impressive compound annual EPS growth rates in the market currently. Some investors might argue that paying 3000x trailing earnings for Shopify is crazy and is a valuation reminiscent of the Dotcom Bubble in 1999.

However, it's important to note that the market is looking ahead to the FY2022 numbers, and this multiple improves to just less than 200x earnings if we use the FY2022 forecast. While this might seem lofty, multiples like this are typically reserved for companies growing at a compound annual EPS growth rate of over 100%.

Chart, histogram Description automatically generated

(Source: TC2000.com)

Fortunately, the valuation had had some time to cool down over the past few months, with SHOP trading in a tight trading range since August, with its weekly moving average finally playing catch up to its price.

It's quite rare that SHOP tests this weekly moving average at all, and it's now sitting near $900.00, and I would expect any test of this level to be a low-risk buying opportunity for investors. Currently, this moving average comes in near $900.00. Therefore, if we see some weakness early in the year with investors booking profits, I believe SHOP is a name to keep an eye on below $915.00.

Moving over to Fortinet, the company just came off a solid quarter in Q3 with revenue up 19% to $651 million and gross margins hitting a new multi-year high of 79.5%. This translated to a 130 basis point increase in gross margins year-over-year, with product margins up to 62.9% due to the company's new FortiGate products' lower cost. While Fortinet's margins were already impressive with a trailing 2-year average of 76.5%, this push to a new high is quite welcome, especially because this is lapping a year of 150 basis point margin expansion in FY2019.

Fortinet's tailwind continues to be the fact that many small and medium-sized businesses are in desperate need of industry-leading security offerings, given that many employees will stay at home even after the vaccine is dispersed.

This is because some companies are choosing to save money on real estate if their teams have been productive from a remote setting, and they simply don't have the security they're used to run their business safely. With the company ranking #1 in the most security appliances shipped worldwide and with over 450,000 customers, it's clear that its products are in high demand. Meanwhile, the company easily meets the Rule of 40, with 19% revenue growth last quarter and a free-cash-flow margin well above 30%.

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(Source: YCharts.com, Author's Chart)

If we look at FTNT's earnings trend, we can see that the stock has put up incredible growth in the past few years, with FY2018 annual EPS growth of 78%, FY2019 annual EPS growth of 34%, and FY2020 annual EPS set to increase by 35%.

While this deceleration might worry some investors, it's worth noting that deceleration is inevitable after a year of 70% plus growth for most companies, and this is completely normal. The more important figure is that annual EPS continues to grow at over 30% year-over-year, despite lapping a year of stunning growth in FY2018.

Looking ahead to FY2021 and FY2022 annual EPS estimates, they're currently sitting at $3.78 and $4.25, respectively. This means that the stock is trading at a very reasonable forward P/E ratio of 33 despite an industry-leading earnings growth rate and steady double-digit sales growth.

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(Source: TC2000.com)

However, the most compelling argument for FTNT is the chart, with the stock pulling back to its long-term moving average last month and now breaking out of its downtrend line this month. As shown above, the stock rarely tests this key moving average, and each test has been a buying opportunity for investors.

Therefore, if FTNT were to back-test this trendline near the $125.00 area, I believe this would be a low-risk area to start a position in the stock. Assuming the company can continue to grow at its current pace, there's no reason the stock can't get to $170.00 per share by the end of next year, based on an earnings multiple of 45.

While the general market remains extended, with many tech names trading at lofty valuations, FTNT and SHOP have taken a rest the past few months and build solid bases that should propel them higher in 2021. Therefore, if we do see weakness in these two names in the coming weeks, I would view this as a low-risk buying opportunity.

As mentioned earlier, the ideal buy points for both names would be below $915.00 for SHOP and below $125.00 for FTNT. For now, I am long FTNT, but I may look to enter SHOP if we see a pullback to the bottom of its multi-month base.

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SHOP shares were trading at $1,069.61 per share on Tuesday afternoon, up $10.44 (+0.99%). Year-to-date, SHOP has gained 169.03%, versus a 16.25% rise in the benchmark S&P 500 index during the same period.



About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.

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