Tech stocks have been going through a bumpy 2021.
Since February, the tech sector has fallen into quite a slump. Meanwhile, as the economy reopens, investors have taken a fresh look at old economy stocks such as airlines, retailers and industrial companies. Inflation fears have further driven traders into cyclical stocks while shunning investments that are more growth-focused. However, with a sell-off comes opportunity.
Many of the more speculative tech stocks such as some of Cathie Wood’s favorites have fallen by half or more since their February 2021 peaks. Even many of the tech blue chips are down 20% from recent levels and have badly trailed the S&P 500’s returns in recent months. With that in mind, these five tech stocks could deliver strong returns both in the near term as the sector rebounds and over the long term as they ride favorable economic and societal tailwinds.
— ServiceNow (ticker: NOW)
— Microsoft Corp. (MSFT)
— Guidewire Software (GWRE)
— Tyler Technologies (TYL)
— Snowflake (SNOW)
Morningstar’s Dan Romanoff labels ServiceNow as one of his top picks in software. At this price, shares offer 19% upside to Romanoff’s $587 price target while also being supported by one of the software-as-a-service (SaaS) industry’s most dynamic companies. ServiceNow’s bread and butter is IT Service Management, which is a core piece of a modern Fortune 500 company’s ability to operate. ServiceNow has aggressively built out more product offerings on top of its core platform. It also makes acquisitions to broaden the base as well. The firm sees its revenues topping $10 billion annually in 2024.
ServiceNow posts consistently increasing profit margins, which speaks to the quality of its business; it isn’t just chasing growth at any cost. Long story short, reliable and fast information technology is vital to modern commerce, and ServiceNow plays an integral part in keeping everything running.
Microsoft Corp. (MSFT)
You can make a solid bullish case for most of the big tech companies. However, arguably Microsoft has the clearest road ahead. Microsoft’s strength comes from its incredible diversification. Buying Microsoft gives shareholders a stake in the core Windows and Office business, gaming, LinkedIn, and the cloud business. This is an incredible mix of stable cash cow operations and enticing growth opportunities.
At first glance, MSFT stock might seem too expensive at 30 times forward earnings. On the other hand, the company has grown earnings at more than 30% per year compounded over the past five years. That’s an astounding figure for a company that is already so large. Microsoft has grown this quickly thanks to the Azure cloud business and there’s little sign of it slowing down yet. Given its rapid growth and unparalleled breadth of revenue streams, Morningstar’s analyst sees upside to $278 per share versus the current $250 share price. Microsoft also grows its dividend quickly, and appears on pace to join the heralded dividend aristocrats list later this decade.
Guidewire Software (GWRE)
Guidewire is the largest provider of essential software to property and casualty insurance firms. Until recently, many insurers used decades-old legacy systems. Guidewire has gradually replaced these with its more modern core software offering. In recent years, Guidewire has added on additional services and capabilities. Looking forward, Guidewire may be able to move into the life insurance vertical, greatly broadening its addressable market.
GWRE stock has underperformed other tech names as it is in the transition period from licensed software revenue to a recurring subscription model. This switchover has caused many a software company to stumble for a while. However, like Adobe ( ADBE) and other software peers, once the subscription model is humming, look for Guidewire’s shares to rerate. In any case, Romanoff sees Guidewire’s fair value at $116 versus today’s $98 price.
Tyler Technologies (TYL)
There are riches in niches. Like with Guidewire, Tyler has carved out a fantastic business in a less glamorous corner of software: government services. Tyler built its company on the back of its Odyssey court management system. Local and state courts rely on Tyler to modernize what were woefully inefficient records management operations. The company has reinvested its cash flows from that into acquisitions for other software platforms aimed at local governments.
This business has grown robustly in recent years. It should see a boost going forward, as well, as the pandemic exposed many weaknesses in governments’ antiquated computer systems. With so many services now needing to be offered digitally, mayors and city councils will be inking new deals with Tyler. Tyler is typically an expensive stock. However, with the recent tech correction, it has pulled back to $403, versus Morningstar’s estimated fair value price of $475 per share.
Snowflake is a rapidly emerging leader in the cloud data management space. Snowflake was built to be cloud-native and allows for processing all of a firm’s data rapidly and securely in one centralized location. The ecosystem easily enables data analysis, transfers, permission management and more. In other words, Snowflake is replacing confusing and often redundant on-premise solutions with a seamless cloud offering.
The company just made its initial public offering (IPO) last year and was one of the largest IPOs ever at launch. Shares proceeded to rocket higher but have since retreated 50% off their highs.
While the share price has cooled off, the business is still cooking. Last quarter, revenues grew more than 100% year over year, making it one of the single fastest-growing software firms out there. The firm’s CEO, Frank Slootman, is a tech industry superstar who previously led ServiceNow for many years. When demand returns for cloud services stocks, Snowflake should lead the recovery.
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Update 06/01/21: This story was published at an earlier date and has been updated with new information.