Got $5,000? 2 Tech Stocks to Buy and Hold for the Long Term
The technology sector has helped lead the market higher not only this year but really for the past decade. This can be seen in the performance of an index such as the Dow Jones Technology Index, which is up over 27% year to date and has generated an average annual return of 20% over the past 10 years.
As such, the tech sector is certainly not only for traders, but also for long-term buy and hold investors. Let's look at two tech stocks that investors can buy and hold for the long term.
1. Microsoft
Once considered to be a stodgy, old-fashioned tech company, Microsoft (NASDAQ: MSFT) has repositioned itself to become one of the top tech companies leading the charge in artificial intelligence (AI). In fact, the company's ability to be able to reinvent itself over the years is one reason why it is a great stock to buy and hold.
Microsoft's first big move showing its ability to adapt to the times was shifting from a one-time purchase model to a subscription model, with the introduction of Microsoft 365 starting back in 2013. The gradual nature with which the company did this proved to be a strong growth driver while not alienating its customer base.
More recently, Microsoft has shown itself to be at the forefront of AI, making an early investment in OpenAI and then later substantially increasing that investment and partnering with the company to incorporate its technology throughout its various product offers. Thus far, the company's Azure cloud computing segment has been a big beneficiary of this early move, as customers clamored to build out their AI applications with the help of Azure. Given Azure's consumption-based model, where customers pay for what they need, this has led to strong growth for Azure and the business taking share from competitors.
Microsoft has also shown a willingness to take big swings with acquisitions over the years, including with LinkedIn, GitHub, and Activision Blizzard. GitHub has been a strong performer for for the company, and it too has been a nice beneficiary of AI, with the introduction of GitHub AI assistant copilots to the developer platform helping drive 45% growth for the platform in the first quarter.
While not currently on many investors' radars when looking at Microsoft, it will be interesting to see what the company does with AI when it comes to Xbox and Activision Blizzard when it releases its next video gaming console in a few years. There could be a lot of growth in store in a few years, given the potential advancement AI will have in gaming.
Trading at a forward price-to-earnings ratio of under 33 times and a price/earnings-to-growth (PEG) ratio of under 0.9 times, the stock looks attractively priced, given its long-term growth potential and its monopoly-like dominance in the worker productivity (Word, Excel, etc.) and PC operating system (Windows) spaces.
1. Alphabet
Similar to Microsoft, Alphabet (NASDAQ: GOOGL) has a monopoly-like dominant market position, but instead of worker productivity tools, it is winning with Google search, which has an estimated over 90% global market share. Like Microsoft, Alphabet's cloud computing segment is nicely benefiting from the AI boom.
The similarities with Microsoft don't end there, as Alphabet has also made shrewd acquisitions. The best example of this is the company buying YouTube in 2006 for $1.65 billion. YouTube generated $8.1 billion in revenue just in the first quarter of 2024, so it's pretty safe to say it was a great acquisition.
Alphabet is currently rumored to be close to acquiring Israeli cybersecurity company Wiz for around $23 billion. If consummated, the deal is expected to give Alphabet a needed security piece to help it win more cloud computing and AI deals.
Meanwhile, Alphabet's core search business has a lot of potential to profit from AI. The company is already experimenting with AI overlays to answer some search-related questions, as well as with ways to monetize this new feature. While it has run into some early AI hiccups, AI overlays still open up a potential avenue to serve ads to the large percentage of search results where it does not provide them. Traditionally, the company only serves ad results to about 20% of its search queries and is only paid when these links are clicked.
Trading at 23.5 times forward earnings and a PEG ratio of less than 0.8 times, Alphabet's stock is cheap. Given the potential growth in front of it and its dominant market position in search, the stock looks like a great technology stock to buy and hold for the long term.
Should you invest $1,000 in Microsoft right now?
Before you buy stock in Microsoft, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Microsoft wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $722,626!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 22, 2024
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Got $5,000? 2 Tech Stocks to Buy and Hold for the Long Term was originally published by The Motley Fool