Tech stocks will bounce back, and these 10 should lead the way.
Is there any hope left for tech stocks? As the Federal Reserve’s rate-hiking campaign kicks into high gear, the situation for tech stocks looks increasingly grim. Certainly, many of the more optimistic technology stories of 2020 and 2021 have crashed and are unlikely to recover. Companies with minimal revenues and large operating losses have seen their moment pass. However, technology as a driving factor of economic growth hasn’t disappeared. Particularly with the stagflation and supply chain crises that the world faces now, technological areas such as green energy, factory automation, and affordable cloud computing and storage are more vital than ever. So while tech stocks have plummeted, it’s not worth throwing in the towel on the whole industry. Here are 10 of the best tech stocks to buy that still have strong prospects for the rest of 2022 and beyond.
Alphabet Inc. (ticker: GOOG, GOOGL)
Alphabet has gotten too cheap to ignore. The knock on Alphabet has always been that the core search advertising business is great but that the company spends too much on questionable side ventures. And that’s not wrong. Alphabet could earn a lot more profit today with a more disciplined approach to capital management. However, the share price has now fallen far enough that Alphabet is a value even if you’re ignoring the firm’s moonshots completely. GOOGL shares are now trading at roughly 20 times this year’s estimated earnings. That’s simply incredible. Over the past decade, Alphabet has grown earnings at 22% and free cash flow at 20% compounded annually. It’s highly unusual to get to buy a dominant tech giant at a price-earnings ratio lower than its typical earnings growth rate. Alphabet is undervalued now, and if any of the moonshots hit, such as in artificial intelligence or autonomous vehicles, that will offer even more upside.
Cisco Systems Inc. (CSCO)
At first glance, Cisco might seem like a rather stodgy internet infrastructure play. There’s some truth to that. Cisco’s revenues have only grown from $46 billion to $50 billion over the past decade, which is hardly impressive. However, there are good things happening under the surface. For example, Cisco has focused on moving toward more subscription services and recurring software revenue instead of one-time hardware sales. This has greatly reduced the previous boom/bust nature of Cisco’s business, along with leading to sharply higher profit margins. As a result, Cisco has grown earnings at a respectable 8% annualized rate over the past decade despite the lack of top-line growth. Shares trade for less than 13 times forward earnings and offer a 3.5% dividend yield. This valuation makes Cisco a superior safe-harbor tech holding for the rest of 2022.
Salesforce Inc. (CRM)
Leading customer relationship management, or CRM, software company Salesforce has seen its stock tumble from the low $200s to just $165 in recent months. At this price, CRM stock is selling for 35 times forward earnings, which is far cheaper than it has usually gone for historically. On a revenue basis, Salesforce is selling for just 6 times sales versus its more normal valuation of closer to 10 times sales. Meanwhile, Salesforce has branched out from its core CRM business. It purchased workplace communications tool Slack, which plugs in nicely to its broader enterprise software cloud. Salesforce is well on its way to becoming an indispensable piece of most companies’ business processes, making the company an easy one to bet on for when software companies start to recover. Morningstar’s Dan Romanoff pegs Salesforce’s fair value up at $305 per share, indicating that the company is at a nearly 50% discount today.
Meta Platforms Inc. (META)
Mark Zuckerberg’s decision to rebrand Facebook as Meta Platforms may go down in history as an all-time branding blunder. The company’s transition to being a metaverse-focused company is certainly off to a poor start. Lost in the noise around Meta’s future plans, however, is that there is still a tremendous business here. The company remains the clear No. 2 player in online advertising and is far ahead of anyone other than Alphabet. While the legacy Facebook platform has lost momentum, Instagram is a powerhouse, and WhatsApp could offer substantial future upside as well. This shows up in Meta’s earnings. Shares are trading at just 13 times trailing earnings. Analysts see earnings dipping slightly in 2022 but returning to record highs in 2023. This represents an approximately 8% earnings yield, which gives Meta a ton of cash to buy back stock in addition to investing in future technologies, such as virtual reality.
Unity Software Inc. (U)
Unity is a leading graphics engine used primarily for video games. Unity has developed an easy-to-use engine that has leveled the playing field, allowing independent game studios to compete with the large-budget game houses. Unity games run seamlessly across consoles, computers, mobile devices and even virtual/augmented reality platforms. The firm has an estimated 70% market share in mobile gaming and has been gaining popularity in the PC gaming market as well. Unity stock skyrocketed last year around excitement for the metaverse. As that buzz disappeared, Unity’s stock collapsed. However, the company continues to grow revenues at nearly 30% per year. In addition to gaming, Unity is also expanding its engine’s offerings to encompass e-commerce, architecture and design, and video animation. The tech winter has crushed many smaller companies, but Unity will be one of the survivors on the other side.
Snowflake Inc. (SNOW)
Snowflake has melted down. SNOW stock has slumped from a peak of $400 last winter to $119.38 per share as of June 17. However, the leading all-purpose data cloud company remains a tantalizing growth story despite the avalanche in its stock price. For the 2020 fiscal year, Snowflake generated $265 million of revenues. This more than doubled to $592 million in 2021. Snowflake brought in $1.2 billion in its fiscal 2022, and analysts see this continuing to soar to $2 billion in 2023 and $3.1 billion in 2024. This is an unprecedented growth rate for a company that is already so large. CEO Frank Slootman is a legend in the tech industry, and investors should give him the benefit of the doubt once again. With the company’s aggressive growth and the fact that the company is already reaching profitability, Snowflake stock is worth buying during its current deep freeze.
Amphenol Corp. (APH)
Amphenol is a diversified electronics components maker. It produces a wide array of connectors, sockets and other such systems for batteries, power grids, automobiles, avionics, consumer electronics and numerous other products. This is admittedly a competitive industry. However, Amphenol’s focus on high-performance components and disciplined cost control has given it a sustainable advantage over its peers. To that point, Amphenol shares have appreciated more than 300% over the past decade. Now, however, the stock has lost a quarter of its value since the recent peak as part of the broader decline in growth stocks. Morningstar’s William Kerwin upgraded Amphenol stock in June, saying that the recent sell-off provides a “rare opportunity” to pick up this high-quality company at a substantial discount. He sees fair value at $83, suggesting shares have more than 25% upside from June 21 levels.
Autodesk Inc. (ADSK)
Autodesk is a “picks and shovels” play on the modern economy. This is because Autodesk makes graphics software that is used in a vast array of industrial applications. Its long-running AutoCAD software is integral for architects, city planners, real estate managers and many other such roles. The software allows engineers to fully lay out a 3D representation of a building and experiment and improve designs without having to expend any real-world resources. A growing field for Autodesk is in what’s known as digital twins. A factory manager, for example, can use Autodesk to create a digital copy of the workplace and start tinkering in an immersive virtual copy without risking any damage to the existing physical setup. Autodesk also provides software for 3D printing, which is another fast-growing field. After falling by 50% from its peak, ADSK stock now sells for just 27 times forward earnings.
Western Digital Corp. (WDC)
Western Digital is a leading supplier of data drives and other data storage solutions. The company is a deep value, with shares currently trading at less than 6 times forward earnings. Investors tend to assign low multiples to the storage industry, thanks to its past history of extreme cyclicality. However, many smaller competitors have exited the industry, leading to better and more stable margins for the remaining players, such as Western Digital. Activist investor Elliott Management has targeted Western Digital stock, saying that shares are sharply undervalued compared to their potential. In response, Western Digital has engaged with financial advisors to see about maximizing the firm’s value. Starting from such a low price-earnings ratio today, upside could be considerable as these efforts play out.
Bruker Corp. (BRKR)
Bruker is a specialized life sciences company making high-end tools for biological and chemical research. The company’s most well-known products are its nuclear magnetic resonance, or NMR, spectrometers. These allow scientists to work with small molecules, such as proteins, to understand how they function. Bruker’s NMR and other such machines allow for improved applications in fields such as drug discovery. In NMR in particular, Bruker has a monopoly on the high end of the market, as sole rival Agilent Technologies Inc. (A) exited the field in 2014. On top of Bruker’s lab equipment, it has a fast-growing business in high-performance superconductor wire products. These go into a variety of scientific tools, including Bruker’s own equipment; however, the real growth field is in renewable energy. Bruker’s shares have dropped by more than 25% this year through June 21, setting up an attractive entry point.
10 of the best tech stocks to buy for 2022:
— Alphabet Inc. (GOOG, GOOGL)
— Cisco Systems Inc. (CSCO)
— Salesforce Inc. (CRM)
— Meta Platforms Inc. (META)
— Unity Software Inc. (U)
— Snowflake Inc. (SNOW)
— Amphenol Corp. (APH)
— Autodesk Inc. (ADSK)
— Western Digital Corp. (WDC)
— Bruker Corp. (BRKR)
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10 of the Best Tech Stocks to Buy for 2022 originally appeared on usnews.com
Update 06/21/22: This story was published at a previous date and has been updated with new information.
