Company / Analytics

Analytics, 21 July 2022

Tech stocks to consider for your portfolio

Tech stocks have in recent times attracted different outlooks from different investors in recent weeks. With inflation still at a nearly 40-year high and the Federal Reserve focused on bringing it down by hiking the federal funds rate, investors have been less keen to buy high-growth tech stocks.

However, to other investors, the recent sell-off in the market has opened up an opportunity for them to snatch up some shares while they’re still down. This group of investors believes it’s a perfect time to start scanning this bear market for quality stocks trading at discounts.

In this article, we analyze tech stocks in two categories; Top tech companies that still have lots of long-term potential for patient investors, and mature blue-chip technology stocks that pay juicy dividend yields worthy of an income-focused portfolio that also happen to be a good bargain.

Top tech companies with potential upside

1. Microsoft

Microsoft hasn’t been immune to the latest tech sell-off, but it certainly hasn’t suffered the same fate as most companies in its sector. Shares are down just 10.6% over the past 12 months, compared to the tech-heavy Nasdaq Composite’s 24.2% plunge.

Why has Microsoft fared better than many of its tech peers? For one, it actually beat Wall Street’s consensus earnings estimate in its third quarter, reporting adjusted earnings of $2.22 per share compared to analysts’ average estimate of $2.19. Investors are focused more than ever on tech companies’ bottom lines right now, and Microsoft delivered.

One of the biggest contributors to its profits is the company’s successful cloud computing business, Azure. In the most recent quarter, sales from the company’s Azure and other cloud services segment grew 46% year over year, and CEO Satya Nadella said that the number of Azure deals worth at least $100 million more than doubled in the quarter.

Azure’s strong position in the cloud computing market is a huge deal for the company and its investors because the cloud infrastructure market will grow to an estimated 30% between this year and next, reaching $156 billion by 2023, according to Gartner. As it grows, Microsoft should be able to continue tapping into this lucrative market.

2. Nvidia

Nvidia’s shares haven’t weathered the great tech sell-off as well as Microsoft’s have (down 25.7% from a year ago), but don’t let this chip company’s recent slide distract you from its long-term opportunities.

For one, Nvidia’s main revenue driver, chips for the gaming market, continues to make significant gains. Gaming revenue increased by 31% in the first quarter to a record $3.6 billion. That growth is impressive, especially considering that the company was facing supply chain issues with chips during the quarter.

Gaming isn’t Nvidia’s only play in the graphics processor market. Nvidia has been steadily growing its data center sales as well. In the most recent quarter, data center GPU revenue increased 83% to $3.7 billion. That was the first time the company’s data center sales were larger than its gaming sales, which is important to note, considering that in just three years, the company has increased its data center sales by nearly five times. Both data center and gaming are important to Nvidia’s future because they’re part of the broader GPU chip market that will be worth an estimated $246 billion by 2028.

3. Doximity

Doximity is an app for medical professionals that allows them to connect with patients as a telemedicine tool. But it’s also a platform for connecting professionals to one another (think LinkedIn for doctors and nurses) and for connecting pharmaceutical companies to medical professionals.

The platform is extremely popular with 80% of doctors using it and 50% of nurses and physicians’ assistants signed up as well. A well-used app is great, but even better is the fact that Doximity is already profitable.

The company’s net income increased 70% in the most recent quarter to $36.7 million. At a time when investors are paying closer attention than ever to a growth stock’s profits, it’s great to see Doximity already checking off this box. The company makes money mainly from pharmaceutical companies and healthcare providers placing ads, and through its subscription services. Sales are climbing quickly as revenue spiked 40% in the most recent quarter, reaching $93.7 million. With this profitable growth stock currently down 19.5% year to date, now looks like a good buying opportunity.

High-Yield Tech Stocks available at a bargain

1. Verizon

Verizon Communications (NYSE: VZ) is a telecommunications company that owns the second-largest wireless network in the United States. Strides in technology have ensured that people use wireless networks and smartphones every day, and these days telecom companies behave more like utilities; they also face limited competition because of the massive investments needed to build and maintain network towers.

Verizon pulls in more than $134 billion in annual revenue and turns about 27% of that into cash operating profits. That’s enough to continue investing in its network while paying a steadily rising dividend. Verizon’s raised its payout annually for 18 consecutive years, and it is on its way to becoming an eventual Dividend Aristocrat. Its dividend payout ratio is also just 49%, leaving plenty of room for affordability and future increases.

The stock has held up reasonably well in this bear market but trades at a price-to-earnings ratio (P/E) of just under 10. The stock’s median P/E over the past decade is 13.5, so it seems that shares represent a solid value for investors.

2. Broadcom

Broadcom (NASDAQ: AVGO) is a company that develops and sells semiconductors and software. Semiconductors are little chips that are essentially the building blocks of technology. Everything from your smartphone to your car uses semiconductors to function, and chips become increasingly important as new technology arises. Broadcom specializes in chips for communications applications, including broadband, networks, smartphones, industrial, and data storage. About a quarter of Broadcom’s business is infrastructure software sold to enterprises for mainframes, security, and networks.

The company does about $30 billion in annual sales, but is a cash-producing machine, getting a whopping $0.48 in free cash flow out of every sales dollar. Management pays shareholders a generous dividend that yields 3.5% and has increased for 13 years. The dividend payout ratio is also just 46%, so there’s plenty of room for future growth.

The stock price is down 25% since January, which has helped push the valuation into value territory. At a P/E of 24, the stock is well below its 10-year median P/E of 30. The company should benefit from 5G technology; analysts believe the company will grow earnings-per-share (EPS) by an average of 14% annually over the next three to five years.

3. Cisco Systems

Cisco Systems (NASDAQ: CSCO) is one of the elder members of the technology sector; it was founded in the 1980s and survived the dot-com crash at the turn of the millennium. Think of Cisco as a one-stop shop for connectivity: It sells routers, switches, and other hardware, as well as the software that supports and secures its networks.

Networks have become more complex over the decades. Especially with remote work becoming mainstream, enterprises need strong networks they can trust. Cisco does business worldwide, generating more than $51 billion in annual revenue. It’s also a very profitable company, getting $0.30 of free cash flow out of every sales dollar, giving Cisco a lot of financial flexibility. The company’s dividend is a big deal for shareholders; about half of Cisco’s cash profits fund the payout. The dividend yield is 3.5%, and management has increased the dividend annually for 12 years.

The year hasn’t been kind to the stock, which has fallen more than 30% since January. But with a P/E ratio of 15 versus a median P/E of 16 over the past decade, the stock’s gone from expensive to a reasonable deal for long-term investors. Cisco’s growth won’t blow you away; analysts expect roughly 6% annual EPS growth moving forward. However, the stock’s juicy yield and steady growth make it worth considering for more conservative investors.

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