The stock market rally after the novel coronavirus selloff has been stellar. Besides expansionary monetary policies, strong fundamentals have triggered the rally for several stocks and industries. And in particular, tech stocks have been on fire.
In fact, it’s the big names in the technology sector that have continued to deliver strong numbers. Innovation-driven business growth holds immense potential for the long term.
That’s why I want to share four tech stocks that you should buy and hold in your portfolio for the long term. These tech stocks have strong fundamentals, robust cash flows and a strong growth outlook for the coming years.
Buy these tech stocks now:
Tech Stocks to Buy: Apple (AAPL)
After a brief decline that was triggered by the coronavirus, AAPL stock has been surging higher. Currently, the stock trades near 52-week highs and I believe that the positive trend is likely to sustain.
From a business growth perspective, there are several reasons to be bullish on Apple. When the company reported second-quarter results for 2020, services revenue reached an all-time high of $13.3 billion. Services revenue growth on a year-over-year basis was 16.5%. With digital content stores and streaming services, it’s likely that this segment will continue to deliver robust numbers.
Another potential game changer for Apple is the company’s wearable, home and accessories segment. For the first half of 2020, this segment reported a turnover of $16.3 billion. With products like Apple TV and the Apple Watch, I expect healthy growth to sustain in this segment.
Overall, Apple is more diversified even as its iPhone remains a cash flow machine. This diversification should help in sustained top-line growth and higher cash flows in the coming years.
FB stock is another name that has surged sharply in recent weeks. I remain bullish on FB stock with a medium- to long-term investment horizon.
The first reason to be positive is the fact that the company’s daily and monthly active users continue to increase. At the same time, I expect steady growth in average revenue per user in the coming years.
It’s worth noting that for Q1 2020, the ARPU in U.S. and Canada was $34.18. In Europe, the ARPU was $10.64. However, the ARPU for Asia-Pacific was just $3.06. In the coming years, there is ample scope for ARPU growth in the Asia-Pacific region. This will translate into higher revenue and cash flows.
Another key upside trigger is the company’s free cash flow. In the last 12 months, the company has generated free cash flow of nearly $23 billion. This provides scope for ample shareholder value creation and inorganic growth.
Recently, Facebook entered into an agreement to invest $5.7 billion in India’s Reliance Jio Platforms. Reliance is the biggest telecom operator in India and the deal gives Facebook an entry into a market with significant growth potential.
Overall, FB stock is attractive with visibility for organic and inorganic growth in the coming years.
AMZN stock just touched a 52-week high of $2,796. While some profit taking is likely, the stock is in an impressive long-term uptrend.
Wedbush analyst Michael Pachter has raised the price target for AMZN stock from $2,750 to $3,050. Pachter believes that stay-at-home orders will benefit Amazon and strong results are likely.
Amazon Web Services is yet another top-line and cash flow driver for the company. Margin growth from the AWS business will help in cash flow acceleration in the coming years. As a matter of fact, AWS is the leader in public cloud computing.
Its worth noting that in the last 12-months, Amazon has reported free cash flow of $24.3 billion. With strong fundamentals, the company is well positioned to accelerate organic and inorganic growth. Focus on innovation is a key factor that will help Amazon stay ahead of the curve and peers across businesses.
Alphabet (GOOG, GOOGL)
Alphabet is yet another innovation-driven technology company that deserves a place in the portfolio. GOOG stock currently trades at $1,392 and Goldman Sachs opines that the stock has a target of $1,775. Therefore, there is room for meaningful capital gains from current levels.
From a business perspective, the company’s top-line growth has been robust with Google Search and Google Cloud delivering strong numbers. In particular, Google Cloud reported revenue of $2.8 billion for Q1 2020, which was higher by 52% on a YOY basis. I expect strong growth to continue in this business.
In the hardware segment, the activations declined on a relative basis in Q1 2020. However, with a strong product pipeline, there can be renewed strength in the business. As an example, Alphabet recently launched Pixel Buds 2.
Like the other technology majors, Alphabet also has strong fundamentals. For Q1 2020, the company reported free cash flow of $5.4 billion, which translates into an annualized FCF of $21.6 billion. Aggressive share repurchases allows for this shareholder value creation.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.