Major U.S. indices have had a strong start to 2019. The S&P 500 enjoyed its best January performance in three decades, gaining 7.8%, as markets successfully bounced back from a dismal end to 2018. The NASDAQ has gained about 11.5% since the year began.
Marquee names such as Facebook (NASDAQ:FB) (NASDAQ:FB), Amazon (NASDAQ:AMZN) (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) (NASDAQ:NFLX) and Google parent Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOGL)—collectively dubbed the FAANGs —have all experienced strong gains over the period, with Facebook and Netflix respectively up around 30% and 33% for the period. That's impressive till you dig a bit deeper into the performance of tech sector shares.
It turns out there's a less well known group of tech stocks that have been riding even higher: the Software & Services Industry Group (NYSE:XSW), currently trading just below an all-time high. It has rallied roughly 18% since the start of 2019, significantly outperforming the NASDAQ.
XSW vs NASDAQ
Household names such as Microsoft (NASDAQ:MSFT) (NASDAQ:MSFT) (+5.5% this year), Adobe (NASDAQ:ADBE) (NASDAQ:ADBE) (+12.6%) and Salesforce (+16%) are all associated with the sector, but it's some of the smaller, lesser-known names in the group that have had eye-popping activity, yet have gone relatively unnoticed.
Of the 164 stocks in the group, we've honed in on three that we consider hidden gems. Indeed, they could provide investors strong long-term growth potential. Each is well worth considering ahead of their quarterly earnings reports later this month.
1. Twilio: Cloud Communications Platform Provider
Shares of Twilio (NYSE:TWLO), a cloud communications platform specialist, are up 27.5% since January 1. Even better, the stock has gained roughly 90% since being highlighted as a top software sector play back in June.
Twilio shares has nearly doubled in the less than five weeks since its most recent low of $73.15 on December 24. It's currently trading at an all-time high of $113.89 as of last night's close.
TWLO 300 Minute Chart
Twilio next reports earnings after the U.S. market closes on Tuesday, February 12. Consensus calls for EPS of $0.04 on revenue of $184.43 million for the fourth-quarter. The company announced a loss of $0.03 per share in the same period a year earlier on revenue of $115.24.
More importantly, investors will keep an eye on Twilio's update regarding their active customer accounts to see if the software provider can maintain its torrid pace of growth as it diversifies its customer base away from Uber, which was once 25% of its revenue. The company announced on its Q3 earnings report that it had 61,150 customers.
In terms of innovation, Twilio has been busy. In 2018, the company launched general availability of Twilio Flex Roadmap, the company's fully programmable application platform contact center, and pushed Twilio Pay, which lets businesses easily and securely accept payments over the phone.
As well, the firm made strategic acquisitions of Ytica, an analytics-driven workforce optimization software company, and SendGrid, the world's largest cloud-based email delivery platform, positioning Twilio to become a leading name in the cloud communications space in coming years.
Shares have gained 212% since its IPO in July 2016.
2. Trade Desk: Digital Ad-Purchasing Platform
Trade Desk (NASDAQ:TTD) shares have been on a tear so far this year, rising almost 34%, with investors growing increasingly bullish on the digital ad-buying specialist. The company, which operates a self-service software platform where customers can buy and manage data-driven digital advertising campaigns using their own teams, has benefited from a burgeoning wave in digital ad-buying.
The stock has gained 45% since hitting a recent low of $102.35 on December 24. It's currently trading at $155.16 as of yesterday's close, just below its record high of $161.50 reached in late September.
TTD Daily Chart
Trade Desk is scheduled to release fourth-quarter earnings on Thursday, February 21, after the close. Consensus calls for EPS of $0.80 on $147.79 million in revenue. The company reported earnings of $0.54 per share in the year-ago period and $102.65 in revenue.
Investors will be keen to hear if the company plans to hike its guidance again, something it has done in each of the last three quarters.
According to International Data Corporation, global digital advertising spending is expected to grow from $229 billion in 2017 to $360 billion in 2021, making up nearly half of the total advertising market. No surprise then that Trade Desk has seen shares rally a staggering 415% from its September 2016 IPO price of $29.12. The company is in prime position to capitalize on this trend in the years ahead.
3. Workday: Enterprise Software Solutions
Workday (NASDAQ:WDAY) offers enterprise-level software solutions for financial management and human resources, such as payroll tools. It was founded by David Duffield, founder and former CEO of PeopleSoft, and former PeopleSoft chief strategist Aneel Bhusri following Oracle (NYSE:ORCL)'s (NYSE:ORCL) hostile takeover of PeopleSoft in 2005.
The stock, which is currently trading at an all-time peak of $189.29, has gained about 18.5% so far this year. It is up 290% since it went public in November 2012 at a price of $49.10.
WDAY 300 Minute Chart
Workday is expected to publish fourth-quarter earnings after the markets close on Thursday, February 28. Consensus calls for EPS of $0.32 on $776.52 million in revenue. The company reported earnings per share of $0.28 and revenue of $582.48 million in the same period a year earlier.
Perhaps of greater interest, Wall Street will be closely watching subscriptions revenue, which jumped 34.7% year-over-year in the third quarter to $624.4 million.
William Blair analyst Justin Furby wrote in a research note on January 31 that the human resources software maker has won a large contract with Accenture (NYSE:ACN) (NYSE:ACN), a major information technology services company. "With close to 500,000 employees globally, Accenture ranks as one of the world's largest employers and would likely be a top-five customer for Workday measured by head count," Furby said in the report.
"A deal of this size could easily be over $20 million of subscription revenue annually (when fully ramped up) and upward of $100 million or more of backlog."
Taking all this into consideration, Workday appears to be quickly transitioning into the go-to name in HR management.