These 2 Tech Stocks With 50%+ ROIC Are Built to Beat the Market

Key Points

• Return on invested capital (ROIC) is a key metric that assesses how well a company turns cash investors give it into profits.
• Sustainably high ROICs can allow for sustained stock market outperformance.
• These two tech stocks have some of the highest ROICs in their sector. If they can sustain this, these names could outperform.

One of the most critical metrics in assessing future investment performance is return on invested capital (ROIC). It helps assess a company’s ability to meet its ultimate goal: taking the money investors provide and turning it into even more money.

High ROICs signal that a company is doing just that. They also have meaningful implications for the future of stock prices. This is because high ROICs indicate that a company has a competitive advantage. If this advantage is sustainable, a company can maintain its high ROIC, which Morgan Stanley NYSE: MS researchers link to stock market outperformance over time.

Below, we’ll examine two tech names that are generating very high ROICs north of 50%. We’ll detail what makes these companies stand out and assess whether they can maintain their advantages and perform strongly going forward.

AppLovin: +50% ROIC, But E-Commerce Push Will Test Its Staying Power

First up is one of the hottest stocks in the market over the past several years, AppLovin NASDAQ: APP. Over the past 52 weeks, AppLovin’s shares have increased approximately 348% as of the July 21 close. The firm’s last 12 months ROIC is approximately 52%. AppLovin has managed to carve out a very strong position in mobile game advertising.

AppLovin’s advertising platform helps gaming companies increase their number of users. The company was originally a mobile game developer, which allowed it to understand the ins and outs of the industry. This put it in a prime position to help other gaming companies increase their user base. However, can the company sustain its high ROIC?

That will depend largely on the success of the next frontier the company is taking on: e-commerce advertising. In e-commerce, AppLovin is stepping into an area where its prior knowledge isn’t as advanced as it was in gaming. Still, the early results have been positive. AppLovin claims it is already generating $1 billion in annual run-rate revenues among e-commerce brands.

Seeing this number continue to grow will be vital to AppLovin continuing to outperform. AppLovin’s e-commerce push is in its early stages, and these brands may just be experimenting with the platform. However, if they don’t see results, they will reduce their spending. This could greatly damage AppLovin’s future growth prospects and indicate that its high ROIC is unsustainable. Thus, investors should stay hyper-focused on the company’s e-commerce push and demand that growth continues.

Monolithic Power: NVIDIA Relationship Puts Future ROIC in Question, But Advantages Remain

Over the last 12 months, semiconductor company Monolithic Power Systems NASDAQ: MPWR generated an ROIC of nearly 56%. However, shares are down around 10% in the same period as of the July 21 close. This comes as many investors are likely worried about the company’s ability to sustain its very high ROIC.

One of Monolithic's key advantages stems from its relationship with NVIDIA NASDAQ: NVDA. Monolithic was previously the dominant supplier of power chips for NVIDIA’s AI servers. Thus, the company has greatly benefited from NVIDIA’s dominant market position, as this drives demand for Monolithic’s chips. However, NVIDIA has begun reducing its reliance on Monolithic by using a larger slate of power chip suppliers. This news caused a big sell-off in shares.

Still, the company continues to be a part of NVIDIA’s future plans as it looks to revamp how data centers receive and use power. Additionally, Monolithic has grown significantly faster than the overall semiconductor industry every year since at least 2019, indicating it has key competitive advantages, regardless of the NVIDIA relationship.

Also, around 68% of the company’s revenue comes from end markets outside of data centers. Many of these markets, such as automotive and industrials, have been in a prolonged downturn. A recovery in these markets, which appears to be in the early stages, could substantially offset a reduction in the company’s business with NVIDIA.

Overall, it wouldn’t be surprising to see Monolithic’s ROIC come down due to other companies competing for NVIDIA’s business. However, Monolithic can sustain a ROIC that is still high overall. This bodes well for the future of shares, especially given their moderate fall over the last 12 months.

Outperformance Could Be on the Docket for APP and MPWR

AppLovin and Monolithic are two firms that have achieved very strong ROIC over the recent past. Both stocks could continue this, which gives them a solid chance to outperform going forward.

However, AppLovin’s prospects are a bit more specious given the rapid rise in shares and its entrance into a new market.