Technology stocks have hit the skids this year amid soaring interest rates, with the tech-heavy Nasdaq Composite index falling 22% year to date.
Rising rates hurt tech stocks by making their future earnings less attractive compared to the climbing interest rates on Treasury bonds.
But have we hit bottom on tech stocks? The likely answer is no, as the Fed has made clear it will continue to raise rates. But it’s not 100% certain, and the Nasdaq Composite has soared 6% just since Sept. 6.
For those of you who do want to start dabbling in tech stocks, here are three mega-caps you might consider. Morningstar assigns all of them a wide moat. A company with a moat can fend off competition and earn high returns on capital for many years to come, the research firm says.
All three behemoths also are undervalued by at least 24% compared to the fair value estimates of Morningstar analysts. Here they are in alphabetical order:
Morningstar analyst Ali Mogharabi puts fair value for the stock at $169. It recently traded at $111.
“Alphabet dominates the online search market with 80%-plus global share for Google, via which it generates strong revenue growth and cash flow,” he wrote in a commentary. That revenue comes from advertising.
“We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in search,” Mogharabi said
He’s optimistic about YouTube too. “We foresee it contributing more to the firm’s top and bottom lines,” Mogharabi said.
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Morningstar analyst Dan Romanoff puts fair value for the stock at $192. It recently traded at $136.
“Amazon dominates its served markets, notably e-commerce and cloud services,” he wrote in a commentary.
“It benefits from numerous competitive advantages and has emerged as the clear e-commerce leader thanks to its size and scale, which yield an unmatched selection of low-priced goods for consumers.”
He’s impressed with Amazon’s Prime offering. It “ties Amazon’s e-commerce efforts together and provides a steady stream of high-margin recurring revenue from customers who purchase more frequently from Amazon’s properties,” Romanoff said.
Romanoff puts fair value for the stock at $352. It recently traded at $266.
“Since taking over as CEO in 2014, Satya Nadella has reinvented Microsoft into a cloud leader such that it has become one of two public cloud providers that can deliver a wide variety of PaaS/IaaS solutions at scale,” he wrote in a commentary.
Paas stands for platform as a service, which entails a full cloud deployment. IaaS stands for infrastructure as a service, which entails cloud service on a pay-as you-go basis.
“Additionally, Microsoft embraced the open-source movement and has largely transitioned from a traditional perpetual license model to a subscription model,” Mogharabi said.