/Happy%20Friends%20look%20at%20phone.jpg)
Technology stocks have had a historic run in 2023, recovering from a disappointing performance in 2022 that was marked by rapid interest rate hikes and a slowing economy. Momentum turned around sharply for the group in 2023, fueled in large part by an AI-driven rally.
However, the Nasdaq Composite ($NASX) hit a hurdle in mid-July, pressured by a mixed earnings season and the looming prospect of additional rate hikes. But with shares now finding their footing and turning higher from recent lows, it looks like an opportune time to scoop up quality names from the outperforming tech sector.
Backed by strong fundamentals, dividend payouts, and positive analyst sentiments, here are three stocks from the mega-cap tech sector worth adding to your portfolio at current levels.
Microsoft
Gone are the days when Microsoft (MSFT) was just a software company making operating systems for computers. With interests in fields from cloud computing to generative AI, Microsoft's wide-ranging credentials in the tech space are hard to dispute.
Along with the broader market, shares of the $2.43 trillion company have stumbled slightly over the past month. Microsoft stock lost 2.2% during the month of August, just a little wider than the Nasdaq's fall of 2.1% over the same period. Year-to-date, MSFT is now up 37%, edging past a 34% return for the Nasdaq.
On the earnings front, Microsoft's numbers for the fiscal fourth quarter surpassed Street expectations. Revenues for the April-June period came in at $56.2 billion, up 8% from the prior year and above the consensus estimate of $55.5 billion. EPS growth was even sharper at 21% YoY to $2.69, which topped the consensus estimate of $2.55. Impressively, the company's EPS has been above Street estimates in four out of the past five quarters.
Meanwhile, Microsoft's prowess in the AI space is well-documented. Recently, news emerged that ChatGPT - the generative platform into which Microsoft has poured billions - surpassed an annual revenue run-rate of $1 billion. Further, ChatGPT recently introduced a version for large businesses which offers “enterprise-grade security and privacy.”
Moreover, Microsoft plans to integrate its generative AI tool Copilot into its suite of Microsoft 365 apps, such as Word and Excel. This provides an additional revenue stream for the company on top of its existing Microsoft 365 subscription fees, reflecting strong pricing power.
With a dividend yield of 0.83%, Microsoft is competitive with its fellow tech peers Alphabet (GOOGL) and Amazon (AMZN). On a forward price/earnings (p/e) basis, Microsoft is trading at 30.08, lower than Amazon at 62.35 but higher than Alphabet at 24.29. On a price/book (p/b) basis, Microsoft is at 11.85 - north of Amazon's 8.26 and Alphabet's 6.42, but not alarmingly so.
Analysts are upbeat about the earnings growth prospects for Microsoft, predicting 12.8% growth for the current quarter and 11.1% for FY 2023.
Overall, analysts have handed out a “Strong Buy” rating on the stock, with a mean target price of $383.49. This indicates an upside potential of about 16% from current levels. Out of 35 analysts covering the stock, 29 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, 2 have a “Hold” rating, and 1 has a “Strong Sell” rating.
Apple
Next up on our list is the most valuable tech company in the world, with a market cap of $2.93 trillion - Apple (AAPL). The Cupertino-based tech titan has revolutionized consumer behavior over the past couple of decades with industry-leading products such as its iPhone, iPad, Apple Watch, and Macbook, among others. In recent years, the company has also made a significant splash with its subscription services such as Apple Music and Apple Pay.
Apple stock, which has a dividend yield of 0.50%, shed over 4% in August due to a mixed set of numbers for the fiscal third quarter, though it's still up 46% year-to-date.
The company reported net sales of $81.8 billion - which surpassed the consensus estimate of $81.69 billion, but marked the third consecutive quarter of declining sales for Apple. Additionally, iPhone sales - Apple's biggest contributor to revenue - fell 2.5% to $39.67 billion, arriving just short of estimates.
However, EPS grew by 5% from the prior year to $1.26, and topped the consensus estimate of $1.19. In fact, EPS has come in above Street expectations in four out of the past five quarters.
That said, the company's moves in the AI space leave a lot to be desired when considering the competition. Although Apple leverages the technology in its digital assistant Siri and in smart photo rendering, it pales in comparison to the scale of its peers. However, it's rumored that the upcoming iPhone 15 (launching this month) will make significant use of AI in Apple's Health App.
Moreover, at the latest earnings conference call, Apple CEO Tim Cook revealed that a sizeable portion of its R&D expenses for the year will be allocated towards the development of generative AI solutions. In fact, a recent report by Bloomberg revealed that Apple is developing its own ChatGPT-like AI chatbot, which engineers call “Apple GPT.” However, a product announcement is not expected before 2024.
Since Apple operates along a number of businesses, the closest identifiable peer seems to be Google parent Alphabet. Apple is trading at a forward p/e of 30.99, a tad bit higher than Alphabet's 24.29. The valuation gap narrows when it comes to p/s, with Apple at 7.75 and Alphabet at 6.03. Finally, Apple is trading at a p/cf of 25.95, compared to Alphabet at 17.31.
Looking ahead, analysts are expecting earnings growth of 7.7% for the current quarter, and a decline of nearly 1% for FY 2023.
Overall, though, analysts are cautiously optimistic about Apple stock. This is reflected in its “Moderate Buy” rating with a mean target price of $205.07, indicating an upside potential of about 8% from current levels. Out of 29 analysts covering the stock, 18 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 8 have a “Hold” rating.
Broadcom
How can we conclude our list of mega-cap tech stocks without including a semiconductor company - the lifeblood of any AI operation? Founded in 1961, California-based Broadcom (AVGO) is a global technology company that designs, develops, and supplies semiconductor and infrastructure software solutions.
With a dividend yield of 1.94% and a market cap of $380 billion, Broadcom is the only company on this list that gained ground in August. The stock added 2.7% for the month, bucking a broader negative trend for the Nasdaq - but with the shares pulling back after earnings, there's still an opportunity to pick up AVGO at a discount to its recently set 52-week high.
On Thursday night, Broadcom reported net revenues of $8.8 billion for the quarter ended July 30, up roughly 5% from the prior year. EPS grew slightly from the year-ago period to $10.54, and surpassed the consensus estimate of $10.42. Impressively, the company's EPS has surpassed expectations in each of the past five quarters.
Unsurprisingly for a semiconductor company, a significant chunk of Broadcom's business is derived from AI. In fact, Broadcom forecasts revenue of $800 million from its AI-deployed Ethernet switches in 2023, up from $200 million in 2022. More broadly, the company expects to generate 25% of its revenues from generative AI by the end of 2024, compared to 15% now.
On the valuation front, Broadcom carries a premium to some of its chip sector peers. AVGO's forward p/e of 26.03 is higher than both Taiwan Semiconductor (TSM) at 19.47 and Qualcomm (QCOM) at 17.31. On a p/s basis, Broadcom is trading at 10.50 compared to TSM at 6.32 and QCOM at 3.28. Finally, on a p/cf basis, Broadcom is trading at 20.99, compared to TSM at 9.70 and Qualcomm at 14.61.
In terms of earnings growth, analysts expect Broadcom to boost its bottom line by 3.9% and 9.2% in the current quarter and FY 2023, respectively.
Analysts remain bullish about the stock, judging by the consensus “Strong Buy” rating. However, given its searing rally so far this year (up 58% YTD), the mean target price of $878.35 is only 0.6% away from current levels.
On the far bullish end of the spectrum, though, the Street-high target price of $1,010 points to an upside potential of more than 15%. Meanwhile, out of 20 analysts covering AVGO, 15 have a “Strong Buy” rating and 5 have a “Hold” rating.
