This year was filled with challenges for most of us, but the unprecedented conditions actually created big tailwinds for many technology companies. The Dow Jones U.S. Technology Index has climbed roughly 46% year to date.
Despite the sector’s impressive run, some promising technology stocks missed out on the rally, and still trade at levels that leave room for huge growth. Here are three such underperforming tech stocks that could turn things around and deliver fantastic returns to shareholders in 2021.
Shanghai-based Baozun (NASDAQ: BZUN) provides e-commerce software and services to large brands that are looking to launch and scale up their presence in the Chinese market. China already has the world’s largest online retail market by far, and its growth is significantly outpacing e-commerce’s gains in the U.S. On the other hand, these tailwinds haven’t translated into big increases in Baozun’s stock price in recent years.
I’ve been a Baozun shareholder since 2018, and the stock’s performance across that stretch has been undeniably disappointing. After seeing the stock surge after my initial purchases, it has slumped over the past year and a half, and I am in the red on my investment. But I’m far from ready to give up on the stock, and recent sell-offs have created a worthwhile entry point for risk-tolerant investors.
The company’s share price is down roughly 52% from the high that it hit in July 2018, and off by approximately 2% year to date. The latest sharp declines were driven by signals that the Chinese government could impose tighter regulations on Alibaba — the country’s largest online retailer and a key partner of (and investor in) Baozun.
While China’s probe into Alibaba raises additional risk factors for Baozun, the market’s sell-off of the smaller e-commerce company looks overblown. It’s still bringing new brand partners on board and growing sales at a healthy clip, and the stock looks cheaply valued, trading at roughly 25 times this year’s expected earnings.
2. Lumen Technologies
Due to declining revenues from Lumen Technologies‘ (NYSE: LUMN) core broadband internet services and management’s decisions to cut its dividend substantially, investors have pushed its stock price downward over the last few years.
The telecom provider, which was previously known as CenturyLink, changed its name in 2020 as part of a rebranding effort, but based on the stock’s year-to-date performance, that switch did little to take the market’s focus off the business’s problem points.
Lumen shares have shed roughly a quarter of their value in 2020, but the business has some underappreciated avenues to recovery, and the stock could be primed for a big rebound in 2021. While the telecom’s copper-based broadband business will likely continue to decline, rising demand for its high-performance fiber-optic connections could help management pull off a turnaround that would prove rewarding for patient shareholders.
The company’s fiber services and software could play a role in supporting trends, including Internet of Things connectivity and the growth of data centers, and Lumen Technologies should be able to earn superior margins for its premium services. Lumen also looks cheaply valued, with shares trading at approximately seven times this year’s expected earnings. And despite management slashing its payout last year, the company’s dividend yield sits at roughly 10.2%, so the stock offers investors an appealing combination of comeback potential and income generation.
The coronavirus pandemic was a growth catalyst for many software-as-a-service (SaaS) companies, but it created a more difficult operating environment for Zuora (NYSE: ZUO). That company’s platform for implementing and automating subscription-based payment systems has a long runway for growth, but large enterprises are its most important customer segment, and such businesses tend to avoid adopting new models and software systems during periods of economic uncertainty.
That’s meant a slowdown in new subscriber additions for Zuora, and its stock is trading down by roughly 3.5% on the year after some big swings. Shares are now down more than 30% from their closing price on the day of the company’s initial public offering in April 2018.
While challenging economic conditions and a lack of clarity about the future held Zuora back in 2020, the good news is that the long-term growth outlook for the subscription economy has not been meaningfully disrupted. Its progress has merely been delayed.
The rise of subscription-based models at both the enterprise and consumer levels over the last decade is far from a short-term trend. Companies have scrambled to reorganize their businesses around recurring revenue streams because those models lead to more predictable sales performance and greater profits over the long term. This value-adding combination is bound to attract a growing number of business adherents, and Zuora’s software offerings have the company in a good position to capitalize on the trend. The business should post better growth in 2021, and it wouldn’t be surprising to see the stock make big gains.
Keith Noonan owns shares of Baozun and Zuora. The Motley Fool owns shares of and recommends Baozun and Zuora. The Motley Fool has a disclosure policy.