Cloud Hosting

By all counts, 2019 has been a great year for investors. After 2018 gained the dubious honor of being the first negative calendar year return for stocks since 2008, the S&P 500 rallied 29% higher. Tech stocks are doing even better, notching a 48% return with just days left before the end of the decade -- as measured by the NASDAQ 100 Technology Sector.

As the 2020s begin, technology -- specifically of the cloud computing variety -- is still one of the primary forces driving the market and the economy higher. Here are three buys for January: Facebook (NASDAQ:FB), Appian (NASDAQ:APPN), and Arista Networks (NYSE:ANET).

There has arguably been no other company in more hot water with consumers and regulators over the last few years than Facebook. Security scandals, privacy concerns, and now government scrutiny over anticompetitive practices (though other tech titans are lumped in with that as well) have taken a toll. Nevertheless, Facebook's platform is as popular as ever, even posting monthly user growth in North America again -- albeit small, at only 1% -- during Q3 2019. Global monthly active users were up 8% during the period, and advertising revenue was up 29%.

Image Source: Getty Images

As a result of that continued growth, the stock climbed a wall of worry and rallied 58% in 2019. Even after that, shares still look attractive to me. Facebook has generated $19.6 billion in free cash flow (money left after operating and capital expenses are paid) over the last year, which values its shares for 30.6 times that profitability metric. That isn't particularly cheap, although it does include a record $5 billion Federal Trade Commission fine and ongoing expenses the company has been incurring to update its advertising platform's privacy and safety features.

All the while, CEO Mark Zuckerberg and his management team expect at least 20% top-line growth in 2020 and for operating expenses to grow in the high teens to low 20% range -- which should equate to strong profitability gains in the year ahead. That makes Facebook one of the fastest-growing tech titans out there, and one of the cheapest.

Data by YCharts.

Another big winner in 2019 was cloud-based low-code software developer Appian, albeit the ride has been far bumpier than Facebook's. After the small company more than doubled in value through the late summer months, shares have steadily declined since then and are now sitting atop "only" a 45% calendar-year gain.

A backtracking stock isn't exactly a welcome situation, but it is a healthy one. Appian's results are being driven by growth in subscription services, primarily user growth on its low-code platform -- a type of toolbox that allows software developers to drag and drop pre-built lines of code to quickly develop an application. With full-year subscription revenue growth conservatively pegged at $154 million (a 33% to 34% annual increase), shares are back at a reasonable level.

Of course, investors should be aware that Appian operates in the red, foregoing profits to maximize growth now. As the last year has made evident, that can make for some wild share price action. However, Appian has a long runway of growth ahead of it, with spending on public cloud services expected to continue growing by double-digits for the foreseeable future.

Organizations need help developing and deploying all of those new digital tools, too, as they suffer from a backlog of tech projects and a shortage of IT talent. Appian is primed to be able to help. Ahead of the company's Q4 earnings report (likely due at the end of January or early February), now looks like the time to pick up a few shares on the pullback.

Image source: Getty Images.

Speaking of the cloud, it's been a rough year for companies involved with the construction of data centers. Small (at least compared to network hardware giant Cisco) components maker Arista Networks is going to end the year with a flat stock performance, erasing a more than 50% gain early on in 2019.

The reason? The "cloud titans" -- think Amazon's AWS, Microsoft's Azure, Alphabet's Google Cloud, and even Facebook's advertising platform-as-a-service -- slowed down their data center construction significantly. The hardware and services provider overcame those challenges, though, and posted 19% revenue growth through the first three quarters of 2019 and 29% earnings-per-share growth. Not bad at all.

However, management forecast a flat year for revenue from its largest customers in 2020, news that investors were none too happy to hear from the growth stock. Its 400G networking technology deployments are also getting pushed back into 2021, further darkening the outlook for the new year. Shares now trade for just 18.3 trailing-12-month free cash flow.

That looks like one of the best bargains in tech to me. The cloud is still growing fast, and Cisco's reports indicate that web traffic will grow by over 20% a year through 2022. Data centers will need to be built and old ones upgraded to account for all of that new data. The mood may have soured on Arista in the short term, but this will still be a fast-growing tech stock in the years ahead.

View original post here:
3 Top Tech Stocks to Buy in January - The Motley Fool