Either way you cut it, information technology is the S&P 500’s best-performing sector. This is true across multiple timeframes, including year-to-date, three years, five years, ten years and, yes, even 15 years (MarketWatch provides the full breakdown on performance here).
Strong corporate earnings and predictably large revenue growth have underpinned the sectors’ marvellous performance over the past decade. If strong sales are a proxy for good investment opportunities, you should consider these three technology stocks right away. They are the technology sector’s biggest revenue growers for the most recent quarter.
Autodesk Inc. (NASDAQ: ADSK)
- Quarterly Sales Growth (YOY): 33%
- Market Cap: $38.3 billion
- YTD Stock Performance: +34.7%
Autodesk is a California-based tech corporation that designs software for a variety of industries, including engineering, manufacturing, and entertainment. You may have heard of AutoCAD, the widely used commercial drafting software application. It was developed by Autodesk, which has significantly expanded its scope and target markets throughout the decades.
After stagnating for three years, company revenues surged in fiscal 2019, reaching $2.57 billion, according to Morningstar. That’s an increase of more than $500 million over the previous fiscal year. Net income has been negative for the past four years but free cash flow surged to $310 million in fiscal 2019. Investors should be encouraged by the company’s massive recurring revenue. Total subscriptions increased 252,000 in the fiscal fourth quarter. Subscription plan revenue reached $2.2 billion.
Microchip Technology Inc. (NASDAQ: MCHP)
- Quarterly Sales Growth (YOY): 33%
- Market Cap: $21.1 billion
- YTD Stock Performance: +24.1%
Microchip Technology, the American semiconductor giant, is also coming off a strong quarter of revenue growth. Net sales totalled $1.33 billion for the quarter ending March, an increase of nearly 33% over year-ago levels. The company is on track to exceed last year’s revenue totals, which may have factored into CIBC’s decision to increase its stake in the company earlier this month.
The company has flagged ongoing U.S.-China trade negotiations as a source of risk in the short-term, but says the resolution of the conflict (one way or another) will remove much of the uncertainty that has dogged the semiconductor industry since the fourth quarter. As Grizzle recently pointed out, semiconductor stocks are extremely sensitive to Chinese demand.
Nevertheless, MCHP has outperformed the stock market this year.
Arista Networks Inc.
- Quarterly Sales Growth (YOY): 26%
- Market Cap: $20.2 billion
- YTD Stock Performance: +25.4%
Headquartered in Santa Clara, California, Arista Networks operates at the intersection of software development and cloud computing. The company designs and sells software-driven networking solutions for fast-growing segments like cloud computing, high-performance computing (HPC), and algorithm-based trading.
The company is only 15 years old but already has thousands of employees and a $20 billion market cap. Arista has expanded its revenue each year since 2011, when sales data were first reported (via Morningstar). Sales exceeded $2.1 billion in 2018, having grown more than 1,400% over the past seven years. Arista is free cash flow positive and profitable, features that are reflected in the share price.
The technology sector has an abundance of riches. By focusing on strong revenue growers, you can reduce the time it takes to pick out potential winners from the rest of the pack. Autodesk, Microchip Technology, and Arista Networks certainly fit the bill.
Disclaimer: Author holds no investment position in Autodesk, Microchip Technology or Arista Networks at the time of writing.