Investors buying tech stocks over the past decade have made a fortune.
Since 2010, the NASDAQ composite, the most popular technology stock market index, is up by nearly 300%.
In 2019 alone, stocks like Microsoft (MSFT), Facebook (FB), and Apple (AAPL) surged by 55%, 57%, and 86%, respectively.
After such remarkable performances, you can’t help but wonder if the fundamentals continue to justify these prices.
The average Nasdaq Composite stock trades at 27 times its annual profits. Meaning new investors must pay a hefty price to add tech stock to their portfolios.
Moreover, this could indicate that the sector is overvalued and vulnerable to a swift downturn.
I believe a better alternative for 2020 is to invest in more traditional cyclical stocks, like industrials, basic materials, and financials.
These sectors are undervalued and, considering we’re in the midst of a global economic turnaround, represent a perfect buying opportunity.
Still, if you’re a long-term investor, tech has a place in your portfolio, and some tech stocks are a solid purchase even at current prices.
Here are three to consider…
Profit From The Rapidly Rising Cloud Industry
When it comes to high-growth tech stocks, I typically recommend companies with robust recurring revenues active in industries that will grow even if economic conditions weaken.
One such stock is Microsoft (MSFT).
Since Satya Nadella took the helm as CEO, the company has experienced a significant turnaround.
Nadella has transformed many of Microsoft’s traditional products, such as Office 365, for example, into subscriptions and steered the company into one of the most profitable businesses of our era—the cloud.
Cloud computing is evolving into a massive industry that is projected to grow at an average annual rate of 32% per year to surpass $623 billion in the next three years.
And Microsoft, with its Azure cloud service solutions, is perfectly positioned to benefit.
In 2019 alone, this business segment increased revenues by 59% and helped the tech giant close the gap on the current cloud market share leader—Amazon.
Moreover, last quarter, the company scored the lucrative JEDI (Joint Enterprise Defense Infrastructure) contract with the Defense Department. Initial estimates show the deal could be worth $10 billion.
With such excellent growth potential, I believe Microsoft justifies its high price tag.
This Traditional Hardware Manufacturer Is Surprisingly Undervalued
While Apple (AAPL) is not considered a services company with recurring revenues like Microsoft, it is well on its way to becoming one.
If you look at Apple’s revenues, services are up by about 25% YoY and now represent 20% of the total.
Furthermore, Apple is bragging it can double services revenues in 2020. Even if they do it in 2021, the rate of growth will be significant and should push the stock’s valuation much higher.
Furthermore, the company’s hardware products are unique compared with those of its competitors because they drag you into Apple’s ecosystem.
If you look at the statistics, Apple has a 90% customer retention rate.
Meaning it has a perfect user base into which to start selling services.
At present, the iPhone producer is still valued as a hardware company with a PE ratio of 25.
In the future, though, I think that number will reach 30, making Apple a worthwhile investment.
Profit From The 2020 5G Launch
Another hardware manufacturer I like is Qorvo (QRVO).
The world is on the cusp of a technological breakthrough—5G.
Compared with its predecessor 4G, 5G provides substantially faster network speeds along with superior network bandwidth and near-zero latency.
5G delivers complete digital connectivity from the network carrier to the user, meaning that it has the potential to unlock a whole new wave of advanced technologies including autonomous driving, remote surgery, delivery drones, and so on.
The arrival of 5G also means that the whole ecosystem needs to be upgraded. Cell-phones, modems, radio towers, …
All of which is creating a strong demand for Qorvo’s portfolio of high-performance, high-frequency RF chips.
Its highly integrated devices are key to making 5G deployment a reality.
Meaning the company will do well over the next couple of years, even if economic conditions deteriorate, making it a buy.
Good investing,
Leon Wilfan
