The tech sector is arguably the most exciting corner of the stock market. New innovations are hitting center stage seemingly every day. When they become popular, the companies behind them make boatloads of cash.
So, it’s not surprising that tech is one of the most popular sectors on the market.
As with any other sector, however, some tech companies are winners and some end up losers. You don’t want to be left holding the bag after investing in the latter.
Best Technology Stocks
The best technology stocks are often household names. After all, tech is a hot topic among consumers, and companies with the best products in the market can become behemoths. But a strong brand name alone shouldn’t be your core reason for picking any stock, tech or otherwise.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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The best stocks in the sector have saturated their market and continue to grow. They’re known for constant innovation and a competitive drive that keeps them at the top.
1. Amazon.com, Inc. (NASDAQ: AMZN)
Best for e-commerce investors.
- EPS: Amazon produced $0.22 per share in earnings in the first quarter, missing analyst expectations of $0.44. The company said the miss was the result of a mix of coronavirus pandemic, economic, and geopolitical headwinds.
- Revenue: First quarter revenues grew about 7% to $116.4 billion, meeting analyst expectations.
- Guidance: The company expects to report second-quarter revenue in the range between $116 and $121 billion. Guidance missed Wall Street analysts’ expectations which averaged $125.5 billion.
- Market Cap: About $1.08 trillion.
You can’t talk about the top tech stocks without mentioning Amazon.com. If you’re like most people, you know the company as an e-commerce giant and likely shop on its website from time to time.
AMZN saw a boost in sales throughout the coronavirus pandemic, and for good reason. As people were being told to stay at home, they started to shop online, and Amazon.com is the go-to online retailer in the United States.
Many expected the company’s revenue to go backward upon the reopening of the economy. That hasn’t been the case. Although revenue growth has slowed, Amazon has consistently grown revenue quarter-over-quarter ever since, even though that growth hasn’t always met expectations.
Nonetheless, Amazon is entering an interesting part of the business cycle, which could become exciting quickly.
Throughout its history, the company has focused on increasing revenue with razor-thin margins. That model works as long as you haven’t already saturated the market, which at this point Amazon has. With revenue growth beginning to slow, it needs to change its focus and put more effort into improving margins.
That’s exactly what the company is doing, but the market doesn’t seem to have included this in the company’s stock price yet.
Recently, the company has become a cloud computing powerhouse thanks to its Amazon Web Services (AWS) brand. Not only is the brand popular with artificial intelligence developers, but the software-as-a-service model has exciting margins and the potential to quickly ramp up the company’s earnings per share.
There’s also a strong undervaluation argument. Amazon has fallen dramatically throughout 2022, and while the price-to-earnings ratio (P/E) on the stock is still about 52, it’s a massive discount from the company’s historical valuation.
On top of all that, the company recently went through a stock split, bringing the price of shares down to a level the average investor could more easily afford. These moves typically lead to gains in the price but have failed to boost AMZN so far, so there’s likely even more room left to climb.
Maybe that’s why AMZN is the third most popular stock in exchange-traded fund (ETF) portfolios and maintains a Strong Buy average rating among analysts, according to TipRanks.
All in all, Amazon.com has faced headwinds in the past and will in the future. However, the company’s dominance in e-commerce, expansion into cloud computing, and success on several other fronts make it a strong pick. The current undervaluation is just icing on the cake.
Pro tip: David and Tom Gardener are two of the best stock pickers. Their Motley Fool Stock Advisor recommendations have increased 563% compared to just 131.1% for the S&P 500. If you would have invested in Netflix when they first recommended the company, your investment would be up more than 21,000%. Learn more about Motley Fool Stock Advisor.
2. Apple, Inc. (NASDAQ: AAPL)
Best for a Warren Buffett top pick.
- EPS: Apple reported earnings per share (EPS) of $1.52 in the first quarter, beating analyst expectations of $1.43.
- Revenue: The company reported $123.9 billion in revenue for the first quarter, an 11% year-over-year gain.
- Guidance: Apple stopped providing quarterly guidance at the beginning of the COVID-19 pandemic.
- Market Cap: $2.2 trillion.
Apple is another household name that earned its position by leading the way in innovation. It claims the top position as the most popular stock in ETF portfolios and the largest company in the United States. It’s also the second-largest in the world, only second to Saudi Aramco, the largest oil producer in the world.
The stock has long been a Warren Buffett favorite too. As the selloff in tech scared many away from the stock in early 2022, Buffett and his firm, Berkshire Hathaway, have been loading up on shares.
Apple is one of the most impressive stocks on the market in terms of cash flow. At the end of the first quarter, it had $193 billion in cash on hand, more than $70 billion over its total debt.
There were some questions at the beginning of the year surrounding the company’s ability to keep revenue growth moving in the right direction in the face of dwindling consumer confidence, but that issue seems to be in the past, considering its strong Q1 performance.
Even in the face of this strong growth, however, the stock’s price has suffered so far in 2022. Year-to-date, the stock is down more than 24%. That may seem like a drawback, but it’s actually a good thing.
It’s likely why Buffett and his band of top-notch investors are gobbling up shares of the stock.
Following recent declines, Apple’s valuation metrics are lower than we’ve seen in years. When you buy in now, you’re essentially clipping a coupon. Some may argue that it’s discounted because of the economy’s headwinds, but Apple has made it through headwinds in the past. Even if it had to pay off all its debt without making another sale, it would have more than $70 billion to come out on the other side and do what it does best — grow.
The bottom line is that Apple is an innovative industry leader, and betting against the company now is likely a bad move.
3. Microsoft Corporation (NASDAQ: MSFT)
Best for banking on enterprise software.
- EPS: Microsoft reported EPS of $2.22 in the most recent quarter, beating analyst expectations of $1.18 per share.
- Revenue: Fiscal third-quarter revenue came in at $49.4 billion, up 18% year over year.
- Guidance: In the fourth quarter, Microsoft expects to produce between $51.94 billion and $52.74 billion in revenue. The company recently cut its revenue forecast from between $52.4 billion and $53.2 billion, citing exchange-rate weakness for the tapered expectations.
- Market Cap: About $1.92 trillion.
Microsoft was first launched as a personal computer company, but quickly shifted gears to software as the PC industry began to falter. Today, it’s one of the largest companies in the world, and it focuses the vast majority of its efforts on software.
If you use Word, Excel, Outlook, or Teams, you use Microsoft-branded products.
In recent years, the company even reshaped how it handles its software business. Rather than selling disks once per year, the company shifted to a Software-as-a-Service model. This greatly reduced its costs and increased margins, resulting in significant improvements in free cash flow.
To add icing to the cake, even though we’re talking about one of the most prolific software companies in history, it’s also trading with a historically low P/E ratio. There are two reasons for the undervaluation, both of which are overblown:
- General Downward Tech Stock Trend. Tech stocks have been trending down this year and Microsoft has simply been caught in the loop. External fears surrounding economic, geopolitical, and social conditions are holding valuations at low levels.
- Activision Blizzard Takeover. Microsoft announced intentions to take over video game maker Activision Blizzard in January. Unfortunately, the deal has yet to materialize. It’s received pushback from the Federal Trade Commission, resulting in fears that the deal won’t close. Microsoft is counting on the acquisition as its entrance into the metaverse, and investors are concerned the deal will fall apart.
To put your fears at ease, I’d like to remind you of a few things. Microsoft has been in business since 1975 and survived the 1987 market crash, the dot-com bubble, the real estate bubble, the Great Recession, and COVID-19. Every time the company comes out on the other end of a crisis, it flourishes. So the recent fear-based selloff is likely overblown.
When it comes to Activision Blizzard, the takeover would give Microsoft an open door to the metaverse — and yes, there’s been some regulatory pushback. To that, I say two things. First, regulatory agencies have pushed back on several big acquisitions that have ultimately gone through. Microsoft is gaining support; even the labor union recently greenlighted the deal.
Secondly, even if the deal does fall through, you have to imagine Microsoft CEO Satya Nadella has a backup plan for a metaverse entrance. So once again, the fears are probably overblown.
The good news is that overblown fears have led to a discount on one of the strongest software companies in the world.
ip: Before you add any stocks to your portfolio, make sure you’re choosing the best possible companies. Stock screeners like Trade Ideas can help you narrow down the choices to companies that meet your individual requirements. Learn more about our favorite stock screeners.
4. Alphabet Inc (NASDAQ: GOOGL)
Best for online advertising dominance.
- EPS: Alphabet reported $24.62 in earnings per share during the most recent quarter, missing analyst expectations of $25.70.
- Revenue: Revenue came in at $68.01 billion, up 22.95% year over year.
- Guidance: Alphabet hasn’t provided revenue or earnings guidance for the full year or second quarter.
- Market Cap: About $1.44 trillion.
Alphabet is another one of the largest companies in the world. It’s the parent company of multiple dominant brands including:
- Google. The preeminent search engine controls 28.6% of U.S. digital advertising spend according to Statista.
- YouTube. According to Statista 81% of Americans use social media giant YouTube.
- Android. Android devices account for 71.86% of all mobile devices around the world according to StatCounter.
Most companies struggle to dominate a single area of business. Alphabet is a dominant player in multiple areas — but that’s not the best part.
Alphabet has seen no slowdown in business, according to recent earnings reports, but its stock has been wrapped up in the tech selloff, leading to massive declines. As a result, this leading tech company with proven growth characteristics is now trading at a similar price-to-earnings ratio as the entire S&P 500.
That’s unheard of, and it represents the lowest valuation Alphabet has experienced in the past decade.
The bottom line with Alphabet is simple. The company is a dominant player in multiple categories and has its fingers in several others it will likely dominate in the long run. There has been no slowing in ad revenue, no reduction in active users, and no real fundamental reason for the stock to fall.
But fall it has.
As many greats say, “It’s time to buy when fear is high.” Investors are fearful that a recession might happen and Alphabet’s revenue might fall. Even if that were the case, the company has plenty of cash on hand to weather the storm, but there’s a strong possibility that these “mights” will never come to fruition.
Either way, they’ve already been priced in, making Alphabet stock a buy.
5. Netflix Inc (NASDAQ: NFLX)
Best for risk-tolerant investors.
- EPS: Netflix reported earnings of $3.53 per share in the most recent quarter, beating expectations of $2.92.
- Revenue: Revenue came in at $7.87 billion in the most recent quarter, up about 10% year over year.
- Guidance: The company didn’t provide revenue or earnings guidance but does expect another substantial loss of paying subscribers in the current quarter.
- Market Cap: About $77.69 billion.
Netflix is likely the last company you’d expect to see mentioned as one of the best tech stocks to buy right now. The company’s shares are down more than 70% so far this year, and everything seems to be working against it.
In the most recent quarter, Netflix reported the first reduction in subscribers it has experienced as a publicly traded company, reporting that 200,000 subscribers had fallen off the count. So, what’s the rub?
Netflix said the drop in active users is the result of a couple of factors. Netflix estimates 100 million people are using its services for free through password sharing. The company also pointed to the fact that competition is flooding the industry.
For the same reasons, the company is expecting another substantial drop in active users in the current quarter.
So what the heck is Netflix doing on this list?
Sure, it’s a risky play, but there are a few reasons to consider investing in NFLX:
- Belt Tightening. Management knows what’s going on and is tightening the belt on spending. They’ve laid off 2% of the company’s workforce and are slashing budgets in multiple other areas, which will likely increase margins.
- Controlled Costs of Programming. Netflix has learned what makes a great show over the years. Although it has been known to throw ridiculous sums of money at projects that fail, it’s slowing that process down too. Instead, it’s focusing on paying reasonable production costs to produce fewer shows. And those fewer shows it produces are expected to be big hits, so big production cost waste is likely behind the company too.
- Password Sharing Crackdown. Netflix is working on a solution to password sharing. Although it may be a long way off, when the solution is found, 100 million users will lose access if they don’t pay for the service.
- New Tier. Netflix also plans to create a new ad-supported tier of service to grow revenue and draw in new users.
- Undervaluation. This is the big part. Netflix shares have given up 70% of their value since the beginning of the year. The stock is trading at pennies on the dollar, and if its plans surrounding the points above work, it could quickly skyrocket.
Yes, Netflix is a risky play. The company is showing signs of a plateau. However, the stock is also trading at a discount and represents a company that’s been through the wringer before and come out better for it. The management team seems to have a grasp on the situation, and if all goes well, Netflix could become a massive winner in your portfolio.
6. Roku Inc (NASDAQ: ROKU)
Best for rebound potential.
- EPS: Roku reported a loss of $0.19 per share in the most recent quarter, missing analyst expectations of a $0.17 loss per share.
- Revenue: The company reported revenue in the amount of $733.7 million, up 27.78% year over year.
- Guidance: The company expects about 2% year-over-year growth in revenue in the second quarter.
- Market Cap: About $11.17 billion.
Netflix launched in 1997, but it was nearly impossible to watch it on your television. When Roku launched its streaming device in 2008, that all changed. Today, the company still sells its streaming device, but it gives you access to much more than just Netflix.
Not to mention, Roku technology comes standard with multiple smart televisions.
Although the company’s innovation and dominance in the streaming sector is interesting, that’s not where it makes most of its money anymore. Today, the company brings in truckloads of cash with targeted advertising.
In the first quarter, 60 million Roku accounts streamed nearly 21 billion hours of video, so it’s clear Roku has a captivated audience.
Now may be the best time to buy. As with most tech stocks, Roku is down significantly so far in 2022. The stock has given up more than 60% of its value.
This is another company where fears are overblown. Much of the declines are because the previously profitable company reported a loss, which stemmed from supply chain issues causing production costs to go up, but those issues are expected to be short-term.
As the supply chain blues become a thing of the past, Roku will likely quickly regain profitability. When that happens, this value stock could quickly transform into a growth stock, generating significant growth for investors.
Final Word
It’s clear 2022 has been far from the best year for tech stocks. Every stock on this list has dipped, some more significantly than others. Although it’s times like these that send the crowd running in fear, it’s also the time when the best deals are available.
You should always do your own research and never blindly jump into any stock just because of a perceived undervaluation by some guy behind a keyboard. But it’s possible to turn the lemons that are tech stocks into long-run lemonade with a little research.