Stocks to Watch in Silicon Valley: Google Inc., Tesla Motors Inc., Palo Alto Networks Inc.

By Markets Fool.com

Silicon Valley has been the "cradle of innovation" for the tech industry since the 1950s. Let's take a look at three top companies -- Google , Tesla Motors , and Palo Alto Networks -- which give investors a good glimpse of innovation within that cluster of Bay Area cities.

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Google: The 800-pound gorilla
Google processes nearly 69% ofthe world's searches, according to Net Market Share, while IDC estimates that Android runs on 77% of smartphones worldwide. Google Chrome is also the second most popular Web browser in the world after Microsoft's Internet Explorer.

Source: Pixabay

That sprawling ecosystem makes it the first stop for most companies looking to buy ads on the Internet. Last year, Google generated $59.6 billion inad revenues, making it the largest Internet advertising company in the world. Facebook came in second with ad revenues of $11.5 billion. Since Google mainly relies on search and ad revenues, it can launch software products like Android, Chrome OS, and Drive for free to attract more users and disrupt companies like Microsoft, which rely heavily on paid software.

Shares of Google have more than doubled over the past five years, but have gone nowhere over the past 12 months. This is mainly due to the perception that Google, once a disruptor, is now being disrupted by Facebook and Amazon's expanding ecosystems.

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Facebook has an untouchable lead in social networking with 1.44 billion monthly active users, which it tethers to third-party apps and sites with single sign-ons. Facebook serves up more video than Google's YouTube, and its mobile display ads in the U.S. generated more than triple the revenues of Google's last year, according to eMarketer. As for product searches, "more than twice" the number of people looking to buy something online start on Amazon instead of Google, according to chairman Eric Schmidt.

Tesla Motors: Turning Silicon Valley Into Motor City 2.0
Tesla Motors has shaken up the auto industry with its elegantly designed electric vehicles. Over the past few years, Tesla's vehicles have evolved from toys for one-percenters to practical vehicles for upper middle-class consumers.

Tesla's Model S. Source: Tesla

Tesla's first car, the Roadster, cost $109,000. Its Model S sedan, which arrived in 2012, costs $67,500 after government incentives. Tesla's upcoming Model X SUV will cost about the same, but the Model 3 -- which will arrive in 2017 -- should cost just $30,000 to $40,000. Tesla is building a massive lithium-ion battery factory known as "Gigafactory 1" in Nevada, which should further reduce costs, while additional Supercharger stations will reduce concerns about vehicles running out of power while on the road.

Tesla's stock has soared 20% over the past 12 months, but the company faces some near-term risks. Last year, electric cars only accounted for 0.72% of all vehicles in the U.S. last year, and gas prices still remain low enough to discourage the adoption of electric cars. Tesla may have the first mover's advantage and premium brand appeal, but well-capitalized luxury automakers like BMW and Daimler's Mercedes-Benz have recently launched high-end EVs which might lure away Tesla's target customers. Moreover, Tesla stock trades at 8.9 times trailing sales, compared to the auto industry average of 0.5.

Palo Alto Networks: Protecting businesses from data breaches
Palo Alto Networks is less well-known than Google or Tesla, but it's a key stock to watch in the network security market. Palo Alto's core product is a firewall which shields businesses from data breaches, which have risen dramatically over the past few years.

Research firm Gartner has recognized Palo Alto Networks as a "leader" in its annual Magic Quadrant for Enterprise Network Firewalls report for four consecutive years. According to the NSS Labs' 2015 NGIPS (Next-Generation Intrusion Prevention System Test), Palo Alto's firewall achieved the highest security efficacy ratings against comparable services when exposed to real-time "drive-by" exploits.

That critical acclaim brings in lots of customers. Last quarter, Palo Alto's revenue rose 55% annually. The company isn't profitable on a GAAP basis, but it only posted a net loss of $46 million last quarter -- up from a loss of $147 million in the prior year quarter.

Palo Alto stock has surged more than 120% over the past 12 months due to heightened interest in network security solutions. However, investors should note that the stock isn't cheap -- it trades at a whopping 16.9 times trailing sales, compared to the industry average of 1.2.

Do your due diligence
Google, Tesla Motors, and Palo Alto Networks respectively represent search ecosystem growth, the disruption of entrenched technologies, and the growing importance of network security solutions. Yet they aren't perfect stocks -- Google has stalled out due to concerns about competition, while Tesla and Palo Alto both have pricey valuations. Therefore, investors should do their due diligence and fully understand these risks before buying any shares.

The article Stocks to Watch in Silicon Valley: Google Inc., Tesla Motors Inc., Palo Alto Networks Inc. originally appeared on Fool.com.

Leo Sun owns shares of Facebook. The Motley Fool recommends Amazon.com, Facebook, Gartner, Google (A shares), Google (C shares), Palo Alto Networks, and Tesla Motors. The Motley Fool owns shares of Amazon.com, Facebook, Google (A shares), Google (C shares), and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.