Tech stocks are off to an uncharacteristically weak start to 2021. The Technology Select Sector SPDR Fund (ticker: XLK) is up just 3% year to date, lagging the S&P 500’s overall gain of around 7%.
However, market volatility hasn’t disrupted the pace of technological innovation in 2021, and long-term investors now have an opportunity to buy the dips in some of the best tech stocks in the world.
The Federal Reserve recently raised its 2021 U.S. GDP growth forecast to 6.5%, suggesting a booming U.S. economy. Low interest rates will also help drive tech spending in coming quarters as companies look to update and digitize their businesses following the health crisis.
Investors looking for some of the top tech stocks to buy in April can start with these five names, according to Morningstar analysts:
— Microsoft Corp. (MSFT)
— Taiwan Semiconductor Manufacturing (TSM)
— Adobe (ADBE)
— Salesforce.com (CRM)
— ServiceNow (NOW)
Microsoft isn’t a flashy new tech brand or a hot new tech initial public offering, but the company is constantly innovating, pivoting and adapting to stay on the cutting edge of technology. Bloomberg News recently reported Microsoft’s latest move is a potential deal to buy messaging platform Discord for more than $10 billion.
Microsoft’s Mixer streaming platform folded last year, but Discord is an extremely popular platform among gamers and could be an excellent complement to its Xbox Live subscription service.
Analyst Dan Romanoff says Microsoft’s gaming business and its Azure cloud services business are booming, and the company’s ability to deliver revenue and margins growth at a $1.8 trillion valuation is extremely impressive. Morningstar has a “buy” rating and a $263 fair value estimate for MSFT stock.
Taiwan Semiconductor Manufacturing
Taiwan Semiconductor is the largest integrated circuit manufacturer in the world. TSMC was an excellent long-term growth opportunity heading into 2021, but the company also has multiple bullish catalysts in play in the near term.
Analyst Phelix Lee says TSMC is the beneficiary of Intel’s ( INTC) struggles with high-performance computing chip manufacturing. Citigroup recently estimated that for every $2 billion in additional processors Taiwan Semiconductor produces for Intel, TSMC will gain an additional $560 million in sales.
Lee also says the current global semiconductor shortage is good news for chip prices and TSMC’s margins. In the longer term, Lee says TSMC is perfectly positioned to capitalize on secular growth trends in artificial intelligence, data analytics and high-performance computing applications.
Morningstar has a “buy” rating and a $136 fair value estimate for TSM stock.
Adobe is a market leader in cloud-based creative software applications, marketing automation and e-commerce applications. Analyst Dan Romanoff says Adobe’s Creative Cloud segment, which includes Photoshop and Illustrator, dominates the market, and its Experience Cloud is a tremendous long-term growth opportunity. The Experience Cloud includes Adobe’s Advertising Cloud, Analytics Cloud, Marketing Cloud and Magento Commerce Cloud businesses.
Romanoff says Adobe’s transition to a subscription model has stabilized its sales growth trajectory, expanded its market to more low-end customers and helped it fight piracy.
He says Adobe will continue to roll out new products and features to help the company leverage its Sensei AI software, improve its customer experience, win new clients, increase average revenue per user and cross-sell its creative and professional offerings.
Morningstar has a “buy” rating and a $500 fair value estimate for ADBE stock.
Salesforce.com is the market leader in software as a service-based customer relationship management. Company shares had a big year in 2020, thanks to the economic shutdown forcing companies to digitize their businesses. However, Salesforce shares have struggled since it announced a $27.7 billion buyout of workplace communications software company Slack back in December.
Salesforce shares are now down about 14% since Dec. 1, but Romanoff says investors should be buying the dip heading into the second quarter. He says the health crisis forced many companies to kick their digital transformations into high gear, and Salesforce should continue to benefit from elevated post-crisis technology spending.
The Slack price tag was certainly high, but Romanoff says the acquisition will help Salesforce improve the flexibility of its offerings.
Morningstar has a “buy” rating and a $265 fair value estimate for CRM stock.
ServiceNow provides SaaS applications used to manage and automate business processes and workflows. After a big year in 2020, ServiceNow shares are down 7% year to date in 2021, but Romanoff says the pullback is an excellent buying opportunity.
The health crisis has pressured companies to aggressively digitize and automate their businesses, which is a tremendous near-term tailwind for ServiceNow. The company reported more than 30% revenue growth in each of the last two quarters.
Looking ahead, Romanoff says ServiceNow will continue its “land-and-expand” strategy of securing new customers with innovative products and then cross-selling additional products to existing customers. Romanoff says ServiceNow’s average deal size is trending higher, and the company’s ability to increase sales to existing clients is impressive.
Morningstar has a “buy” rating and a $573 price target for NOW stock.
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