Tech stocks, including most big tech names, have been performing very badly in the first few weeks of this year. The Nasdaq 100, which is made up primarily of large tech companies, has tumbled 13% in 2022 so far.
But investors who follow a few principles when it comes to buying large tech stocks can easily outperform the Nasdaq and the Nasdaq 100, while making significant profits this year.
First of all, with the Street very bearish on unprofitable and high-valuation firms in this elevated inflation, rising interest rate environment, medium-term investors should only buy the shares of large tech companies that are firmly in the black. Secondly, with very few exceptions, they should avoid the shares of companies seen as pandemic plays.
Also importantly, tech stocks that are in the sectors viewed relatively optimistically by Wall Street should be emphasized. Among these are IT security, the cloud, semiconductors and fiber optics.
Photo of IBM (IBM) building as seen through the canopy of a tree. IBM logo is in large letters on side of building.
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This “old tech” stock has all of the characteristics that I outlined in this column’s introduction. It’s definitely profitable, as analysts on average expect its 2022 earnings per share to come in at nearly $10. And, trading at about 13 times that $10 estimate, it’s certainly cheap. Finally, IBM is heavily involved in the cloud.
More specifically, as I pointed out in a December 2021 column, IBM CEO Arvind Krishna has adopted a hybrid cloud strategy, which involves marketing the conglomerate’s “software tools that connect multiple public clouds to companies’ on-premise data centers and edge environments.” With many businesses very concerned about cloud outages, that should be a winning strategy this year.
Additionally, IBM’s spinoff of its less profitable businesses, completed in November, should greatly boost the valuation of IBM stock.
Finally, Krishna is widely viewed as doing a good job so far, and the company does not face significant regulatory headwinds.
Microsoft (MSFT)
Image of corporate building with Microsoft (MSFT) logo above the entrance.
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The second-largest cloud infrastructure provider, Microsoft is very well-positioned to benefit from the technology’s growth his year. Specifically, well-respected research firm Gartner predicts that cloud spending will grow to $482 billion this year, versus $313 billion in 2020.
Indeed, with the work-from-home trend staying stronger than many had expected, the cloud is going to stay critical for the foreseeable future.
Microsoft has a reasonable valuation (after its recent pullback, MSFT stock is changing hands for less than 32 times analysts’ average 2022 earnings per share (EPS) estimate). Meanwhile, like IBM, it definitely is quite profitable, and it’s unlikely to face any difficult regulatory challenges in 2022.
Also like IBM, the company is poised to continue getting a lift from the work-from-home trend. Not only will Microsoft’s cloud unit be boosted by that trend, but its Windows business should continue to be lifted as more work-from-home employees upgrade their home computer hardware and software.
Tech Stocks to Beat the Nasdaq: Palo Alto Networks (PANW)
Palo Alto Networks (PANW) logo on corporate building
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One of the world’s premiere cybersecurity companies, Palo Alto is often on “the short lists” of major IT security deals. And given the multiple huge cyberattacks that major companies and governments have absorbed in recent years, cybersecurity is becoming more crucial than ever. Also likely to increase cybersecurity companies’ top and bottom lines is the ever-accelerating Internet of Things trend, including the rise of connected cars.
Importantly, with the federal government continuing to rapidly increase its spending on cybersecurity initiatives, the company has a substantial federal IT security business. What’s more, as artificial intelligence is becoming much more important in the sector, Palo Alto is quickly increasing its utilization of the technology.
Analysts expect the IT security giant to generate EPS of $7.23 this year, up from $6.14 in 2021. PANW stock is changing hands for 67 times the mean 2022 EPS estimate. That sounds high, but it’s actually fairly low for the hot cybersecurity sector.
Alphabet (GOOG, GOOGL)
Earnings reports: Google (GOOG, GOOGL) headquarters in Mountain View, California.
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With its highly profitable search ad business that’s seemingly impervious to recession, the pandemic, the recovery from the pandemic, Apple’s (NASDAQ:AAPL) new privacy rules and inflation, Alphabet has become a FAANG favorite on the Street.
In Q3 2021, the company’s profit rose by a huge 66% year-over-year to an incredible $19 billion, while its ad revenue climbed 43% YoY.
Alphabet has been cutting its costs, and 2022 could be the year when its Waymo self-driving unit starts really putting its tremendous commercial potential on display. The unit intends to launch multiple pilots in Texas with its partner, logistics firm JB Hunt (NASDAQ:JBHT), this year.
JMP Securities analyst Andrew Boone told The New York Times that “it just appears that the company is immune to the impact” of government regulations. The company’s financial help for the Democratic Party will probably help it avoid any tough penalties from Washington.
Tech Stocks to Beat the Nasdaq: Taiwan Semiconductors (TSM)
image of TSM semiconductor office building
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Benefitting from the incredibly strong demand for chips, the company recently reported higher-than-expected Q4 EPS, which represented an all-time high for Taiwan Semiconductor. In Q1, the chip giant expects its operating profit margin to come in at 42%-44%.
With the chip shortage still going strong and Taiwan Semiconductor investing heavily in expanding its capacity, the company should continue to benefit from incredibly strong demand for its products for a long time. That’s especially true since it makes top-notch chips for which there is exceptionally strong demand.
TSM stock is down 1.4% year to date and down 14.5% since Jan. 14, creating a very good entry point.
PayPal is not in one of the sectors currently favored by Wall Street, and some see its sector, fintech, as a pandemic play.
Nonetheless, the company is the top name in the fintech space, which is still expected to grow at a very healthy compound annual growth rate of 24% from 2022 to 2027. As I pointed out in a previous column, PayPal has a tremendous first-mover advantage in the sector, with 400 million customers and “5 billion transactions plus a quarter.”
PayPal’s 2021 EPS is expected by analysts, on average, to be a robust $3.48, and its 2022 EPS is expected to climb to $3.97.
Considering all of these positive points, its forward price/earnings ratio of 33, based on analysts’ average 2022 revenue estimate, is a steal.
Tech Stocks to Beat the Nasdaq: Ciena (CIEN)
Ciena (CIEN) sign in Silicon Valley.
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Benefiting from the rollout of 5G, CIEN stock is still up 21% over the past three months despite the tech pullback.
In a Jan. 11 note to investors, Bank of America wrote that “networking is back.” In the same note, the firm raised its price target on CIEN stock to $91 from $83.
In Ciena’s fiscal Q4 that ended in October, its revenue jumped 26% YoY to $1.04 billion, and its EPS came in at 85 cents. And in very good news for the company’s shareholders, its board authorized $1 billion of stock repurchases. Impressively, its backlog reached $2.2 billion as of the end of October, up from $1 billion during the same period a year earlier.
Ciena’s CEO, Gary Smith, told Barron’s that it was benefiting from prolific orders by both telecom carriers and companies in the cloud sector.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
