Best tech stocks of May 2024

view original post

The best tech stocks provide long-term growth without the risks typically associated with Silicon Valley startups. They have reasonable valuations and generate consistent profits.

“Big Tech should not be lumped together and investors would be wise to separate the sector by industry group and focus on those that can deliver consistent earnings into a contracting economy,” said James Demmert, chief investment officer at Main Street Research.

We selected the best tech stocks of 2024 based on earnings expectations, positive net income in at least four of the past five years, large market capitalization and a “buy” consensus among analysts.

Best tech stocks

Compare the best tech companies

Methodology

Our best tech stocks trade on a major U.S. stock exchange and meet the following criteria:

  • Consensus analyst recommendation of “buy” or better. A high number of analyst “buy” ratings indicates an expectation the stock will outperform the overall market.
  • Market capitalization of at least $10 billion. A company with a leading market share and competitive advantages in a sizable industry, will have a market cap greater than $10 billion. Small- and mid-cap tech stocks generally either have too much risk associated with their outlooks or are not operating in an industry with significant long-term growth prospects.
  • An Altimeter overall grade of at least a B as of May 2023. In selecting the best stocks for this list, we applied a screen, considering only stocks rated a B or better by Altimeter. The overall grade takes into account profitability, earning stability, valuation and earning expectations. Grades of B or higher for both are stocks that are ranked in the top percentile of nearly 5,000 stocks in Altimeter’s stock database. This indicates that these companies have strong valuations with the ability to improve returns.
  • Positive net income in at least four of the past five years. Many high-growth tech stocks are not profitable, which is a reflection of their unproven business models. We screened for profitability in at least four of the past five years. This type of screen among the selected stocks shows whether the business is consistently profitable despite blips, such as the COVID-19 shutdowns in early 2020.
  • Forward earnings multiple less than 30. Tech stocks generally have higher valuations than the overall market because of their growth opportunities. While it’s okay for investors to pay more for growth, stocks with forward earnings multiples over 30 are at risk of significant downside in the event of a cyclical economic downturn or a slowdown in revenue growth.

Why other stocks didn’t make the cut

Exciting technology also inspires great enthusiasm among investors, making the tech sector prone to bubbles and unrealistic valuations. The dot-com bubble of the late 1990s is one of the most well-known examples of this type of irrational tech sector pricing. Investors should avoid tech stocks priced at sky-high P/E ratios, price-to-sales (P/S) ratios or price-to-free cash flow ratios.

Investors should typically avoid stocks that trade at excessive price-to-earning multiples such as Tesla (TSLA). The stock’s forward P/E is over 70. A forward P/E is a current stock’s price over its predicted earnings per share. All the stocks selected for this list have a forward P/E of 30 or lower. For example, the forward P/E for SAP is close to 20, givin

Final verdict

The technology sector has plenty of stocks with exciting growth potential and the possibility of generating robust long-term gains for investors. But many of the highest-growth technology companies have not yet demonstrated they can consistently turn a profit, relying heavily on debt and share offerings to fund their growth investments.

One of our top recommendations for best tech stocks is Broadcom, which has a reasonable valuation and a high return on assets compared with its peers. In terms of risk, there are no major flags indicated by Altimeter’s risk assessment tool. 

Types of tech stocks

Technology impacts virtually every different part of the economy. Some tech companies specialize in consumer electronics, such as Apple (AAPL), Sony (SONY) and GoPro (GPRO). Others specialize in software infrastructure, such as Microsoft (MSFT), Oracle (ORCL) and Adobe (ADBE).

Semiconductor and semiconductor equipment makers are also popular technology stock investments, including Nvidia (NVDA), Advanced Micro Devices (AMD) and Taiwan Semiconductor Manufacturing (TSM). Other tech industries include communication equipment, computer hardware, electronic components, information technology services, scientific and technical instruments, solar technology and others.

How to invest in tech stocks

Investors who are comfortable with their ability to analyze tech stocks can create a personalized portfolio of individual tech stocks by choosing stocks they believe will outperform their peers. For example, an investor may choose to buy shares of our five best tech stocks included above. However, before buying shares of any individual tech stock, ensure you fully understand the company’s business and financial metrics and are comfortable using basic fundamental valuation strategies. In addition, individual tech stock investors can reduce risk by diversifying their investments into a large number of stocks rather than concentrating on only a few.

Investors can also invest in tech stocks via technology exchange-traded funds, such as the Technology Select Sector SPDR Fund (XLK). These tech ETFs provide an easy way for investors to add diversified exposure to dozens or even hundreds of tech stocks at a time. But while tech stock ETFs help reduce the risks associated with individual tech stocks, they also limit the upside investors can experience if they focus their investment on a handful of top-performing companies. Tech stock ETFs also charge management fees in the form of expense ratios that can eat into returns over time.

Pros and cons of tech stocks

Tech stocks have a strong track record of outperforming the overall S&P 500 index, but they also come with a unique set of risks.

Tech Stock Pros:

  • Sector performance. In the past 10 years, the Technology Select Sector SPDR (XLK) exchange-traded fund has generated a higher return than the S&P 500.
  • Diversification. Because technology is utilized in so many ways, it’s possible to construct a portfolio of tech stocks that aren’t highly correlated.
  • Revenue growth. The technology sector is known for its growth stocks, increasing the potential long-term upside for investors.

Tech Stock Cons:

  • Valuations. Many tech stocks trade at extremely high valuations based on profitability and sales.
  • Volatility. The tech sector is known for its volatility and is often among the hardest hit during market downturns.
  • Dividends. While some tech stocks pay generous dividends, they are not typical for stocks in this sector.

Frequently asked questions (FAQs)

Yes, high-quality tech stocks with sound financial fundamentals and reasonable valuations are as safe as any top stocks from any other market sector.

Higher interest rates aren’t inherently bad for all tech stocks. But rising interest rates tend to negatively impact the valuations of high-growth stocks, many of which are in the tech sector. 

Analysts often use discounted cash flow models to value growth stocks, and these models assign less value to future cash flows when the discounted interest rate is higher.

The technology sector has produced some of the best-performing stocks in history, including Apple, Microsoft and Nvidia. 

To avoid the volatility and risks often associated with tech stocks, long-term investors should maintain a diversified investment portfolio and focus on profitable, high-quality tech stocks with attractive business fundamentals.

The so-called “big seven” tech stocks are Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA), Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META). While these stocks heavily rely on technology at the core of their businesses, Tesla and Amazon are technically classified as consumer discretionary stocks and Meta and Alphabet are included in the communications services sector.

Editor’s Note: This article contains updated information from previously published stories: