3 Top Trends to Invest in for 2022 (and Beyond) – Motley Fool

The last two years haven't been easy or predictable for investors, but 2022 will present its own challenges. Uncertainty about interest rate increases and the new omicron coronavirus variant have triggered some volatility in the stock market recently, and it could carry into the new year.

But long-term strategies tend to negate short-term noise, and with the recent dip in some technology stocks, 2022 might be a great time to buy with a multi-year focus. To pick your stocks, it might be a good idea to focus on broad trends in high-growth industries.

Three Motley Fool contributors have identified Microsoft (NASDAQ:MSFT), Snowflake (NYSE:SNOW), and Upstart Holdings (NASDAQ:UPST), because together, they operate in industries that will represent trillions of dollars of economic growth throughout this current decade.

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Anthony Di Pizio (Microsoft):Cloud computing, in the simplest of terms, is the business of accessing data and programs online using the internet, rather than having them installed on computers or devices locally. In an era of remote work, and with companies operating in dozens of different countries, the cloud makes conducting everyday operations so much easier because it effectively connects organizations together internally -- no matter the location.

The popularity of this technology is evident in the numbers. By 2026, the cloud computing market is estimated to more than double to $947 billion in annual spend. The cloud services industry is dominated by a small handful of tech behemoths, and one of them is Microsoft. The average consumer probably associates the company with its Windows computer operating system, or its Office 365 software -- and why wouldn't they? These products serve billions of people globally.

But of Microsoft's three main business segments, cloud computing is in fact its largest, accounting for over 37% of total revenue in the recent fiscal first quarter of 2022. Cloud is also growing significantly faster than Microsoft's overall revenue.

Metric

Fiscal Q1 2021

Fiscal Q1 2022

Growth

Total revenue

$37.1 billion

$45.3 billion

22%

Cloud revenue

$12.9 billion

$16.9 billion

31%

Data source: Microsoft

This trend has been apparent for quite some time at Microsoft. From fiscal 2019 to fiscal 2021, cloud revenue grew at a compound annual rate of 24% compared to 15% for overall revenue.

Microsoft's cloud business is driven by its Azure platform, which provides over 200 different products and services, some of which rely on incredibly advanced technologies like artificial intelligence and machine learning. These can be used to analyze speech and images, and even make predictions using data. But Azure also caters to high-demand services like application development, security, and the Internet of Things.

I think Microsoft is one of the best stocks to buy for exposure to the cloud. It's not just because the segment is growing so quickly, but also because investors are buying a suite of other incredible businesses. Aside from the software offerings mentioned earlier, the company owns Xbox and Surface, which are multi-billion dollar hardware brands in their own right.

This diversity could make Microsoft the ultimate play in an uncertain 2022, and beyond.

Image source: Getty Images.

Jamie Louko (Snowflake): Companies have been producing an increasing amount of data over the past few years: 90% of the world's data has been created in just the past two years, and the amount of data that is being made today is expected to double in another two years. This rapid increase in data will result in companies needing more capabilities to analyze and process their growing amounts of data, and Snowflake is allowing them to do so.

The company offers businesses the ability to freely bring and store their data on Snowflake servers, and the companies only pay when they want to query and access their data. With businesses receiving increasing amounts of data every day, Snowflake is an easy choice because it doesn't charge to store the data. This has resulted in rapid adoption: Snowflake's third-quarter customer count grew 52% year over year to 5,416 customers.

This feature of Snowflake's business is what attracts customers, but the analytics is where Snowflake will thrive. With more data, companies will have to analyze their data more often, leading to increased interaction with Snowflake. The company has already seen success with this business model. The number of customers spending over $1 million with Snowflake increased 128% year over year to 148 customers in Q3. Additionally, customers who spent $100 one year ago are spending on average $173 today.

The company sees an addressable market of $90 billion ahead of it today, which is why it is heavily investing back into the business. Snowflake spent over $306 million in sales and marketing expenses and research and development, which resulted in immense unprofitability in Q3. The company lost $155 million -- representing roughly 46% of Q3 revenue. While this net loss is bad today, as Snowflake's expenses pay off by gaining market share and developing new products, the company will be able to scale back its expenses as growth continues.

Here's the bottom line: Snowflake's business model makes it easy for customers to join the platform, and the fast-growing data analytics market will undoubtedly grow rapidly through 2022. With these two tailwinds pushing Snowflake forward, it is well positioned to flourish in 2022 and beyond.

Image source: Getty Images.

Trevor Jennewine (Upstart): Artificial intelligence will likely be one of the most transformative technologies ever conceived of by the human race. It has the potential to improve efficiency and productivity across virtually every industry, and it will likely create tremendous wealth in the process. In fact, McKinsey & Company forecasts that AI will add $13 trillion to global economic output by 2030.

On that note, Upstart is a great example of a company using artificial intelligence to solve real-world problems. Specifically, its platform aims to make loans more accessible for consumers and less risky for lenders. Whereas traditional credit models consider between eight and 30 variablesto determine who qualifies for credit, Upstart captures over 1,600 data points per borrower, and measures those data points against repayment events. That means Upstart's AI models get smarter each time someone makes or misses a payment.

More importantly, Upstart's decisioning technology considers more data, which theoretically allows it to quantify risk more precisely. In fact, internal studies have shown that Upstart's AI models can reduce a bank's default rate by 75% while holding the approval rate constant. Alternatively, its platform can boost the approval rate by 173% while holding the loss rate constant.

Not surprisingly, Upstart has seen strong demand from banking partners. Over the past year, its client base tripled, and the company made significant headway in the auto lending industry. As a result, transaction volume surged 244%to $3.1 billion in the third quarter, and revenue soared 250% to $228 million. Even more impressive, despite being a young fintech company, Upstart is profitable according to generally accepted accounting principles (GAAP).

Going forward, I think Upstart can maintain that momentum. Over the last 12 months, its technology powered $8.9 billion in loans. But management puts its total addressable market at $753 billion, and that figure could get even bigger if Upstart expands into new industries -- for instance, mortgage loan originations total $4.5 trillion each year.

More importantly, Upstart's AI models appear to give the company a significant advantage. Assuming that holds up in the years ahead, I think shareholders could see 10x returns over the next decade.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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3 Top Trends to Invest in for 2022 (and Beyond) - Motley Fool

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