On multiple occasions, I’ve delivered a lecture — or better yet, a crazed rant — on how a handful of tech stocks are propping up the equities market. I haven’t changed my tune on that issue. However, my generalized wariness of frothy technology stocks doesn’t mean that I’m bearish on each individual name within the sector.
In order to pick out three tech stocks with strong upside potential, I took a look at some of my favorite traditional valuation metrics. This includes the good old price-to-earnings ratio (P/E), as well as the 52-week range.
Then, I had to basically ignore those metrics. Why? Because in this crazy market, the “buy high and sell even higher” has supplanted the “buy low, sell high” strategy.
This means that my favorite stocks in the technology sector are fairly expensive according to the old-school measurements. So, I had to determine whether their valuations are justified based on other considerations. And, to some extent, I had a gut feeling that these are just great companies that happen to be worth their high price tags.
Therefore, let’s dive into my three pricey tech picks — then, and see if you agree.
Tech Stocks to Buy: Alphabet (GOOGL, GOOG)
Google parent company Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) recently surpassed the $1,500 mark, making it one of the most expensive stocks on the NASDAQ Composite. However, the stock fell on Monday to drop below that level.
It seems like just yesterday — more accurately, it was October of 2017 — when Alphabet stock shares were $1,000 apiece. So it might seem difficult to justify the price appreciation of the recent past; Not to mention the potential for further gains ahead.
Nevertheless, I appreciated Google’s ability to stay ahead of the curve — and we’re seeing evidence of this as Google Cloud CEO Thomas Kurian finishes his first year on the job. Under his watch, Alphabet is turning Google into a prospective cloud powerhouse; Including the latest development being the acquisition of mainframe-architecture specialist Cornerstone Technology.
No guarantees here, but Alphabet stock could push higher based on cloud-sector expansion alone. Google’s cloud business generated revenues of $8.92 billion in fiscal-year 2019, and I expect this year’s revenues to easily beat that figure.
Overall, Alphabet stock is a great option for investors looking to add tech stocks to their portfolio.
GPU-market fave NVIDIA (NASDAQ:NVDA) sports a hefty trailing 12-month P/E ratio of 61, and recently pierced above the $300 price point.
So, can we find a reason to resist taking profits here?
Bernstein analyst Stacy Rasgon seems to think so, as indicated by an upgrade to “outperform” and a lofty price target of $360. I also think Rasgon is correct when saying there “wasn’t much to nitpick on the quarter” regarding NVIDIA’s fourth-quarter earnings. Furthermore, Rasgon also is right that the company can now boast “a ‘clean’ (no crypto) gaming profile, improved Turing traction (& forthcoming new product cycle), & return to hyperscale builds.”
The company’s recently released fourth-quarter earnings results are essentially a road map to future gains in NVDA stock. With quarterly revenues of $3.11 billion (vs. $2.96 billion expected) and earnings per share of $1.89 (vs. $1.66 expected) along with $958 million in data-center revenues (a quarterly record for NVIDIA), a high price tag means little as this is a tech company with incredible forward momentum.
Advanced Micro Devices (AMD)
Somewhat close to its 52-week high and bearing a trailing 12-month P/E ratio of (brace yourself, please) 166, Advanced Micro Devices (NASDAQ:AMD) stock feels more than a little bit bloated from a traditional perspective.
Regardless, Wells Fargo analyst Aaron Rakers recently raised his price target on AMD to $64. That said, I tend to concur as the company’s “NVIDIA killer,” technically known as the RDNA 2, could prove to be 2020’s most powerful GPU — even if it’s not likely to “kill” the demand for NVIDIA’s also robust processing units.
AMD stock’s big price could also be justified by a big piece of news: the company’s Epyc Rome 7002-series processor cores will reportedly be used as a component in the U.S. Navy’s supercomputers. These military supercomputer systems are scheduled to be operational by early 2021. But don’t be surprised if the share price jumps in anticipation of this partnership between Uncle Sam and AMD.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.