Tech stocks have been somewhat on the outs lately. Nasdaq’s (NASDAQ:QQQ) bear market hid the extent of the selloff in 2022. Companies with a mega capitalization in the trillions of dollars have a bigger weighting in the index. Since they fell by less than the broader technology market, the bear market looks better than it is.
Investors fearful that markets will shun over-valued, money-losing companies should consider buying the biggest tech stocks. Large firms have a better balance sheet to weather the potential headwinds in the coming year.
In addition, growth investors will inherently flock to the safest technology names. In good times, those companies could afford steep valuations. Back then, the central bank looked like it would keep interest rates low forever.
Steady, measured rate hikes will force markets to re-value expensive stocks. Since borrowing costs will rise, investors will want to buy tech stocks with a healthy balance sheet and manageable debt.
Adobe (NASDAQ:ADBE) is one of the early tech stocks to benefit from a subscription model. It updates its product regularly, which sustains customer satisfaction. Investors enjoy its top-line growth in the mid-to-high teens. In addition, Adobe has stable operating margins despite the macroeconomic headwinds.
Investors sold ADBE stock on worries that its business in Europe would lag. The company expects to report ~$440 million in net new ARR. It reported total revenue of $4.34 billion. It expects revenue growth of 13% year over year in digital media, 15% revenue growth in digital experience, and 17% growth in digital experience subscription revenue.
Adobe may strengthen its competitive advantage as it continues to release regular updates to its creative cloud desktop apps. Margins will expand after it replaces its lost revenue from its discontinued business in Russia.
Furthermore, Adobe will raise prices in the third or fourth quarter. Markets will reward the stock as margins expand later this year.
Autodesk (NASDAQ:ADSK) is a software architecture firm. In the first quarter, the company reported earnings of $1.43 a share after revenue grew by 18.3% year over year to $1.17 billion.
Autodesk said it generated a healthy $434 million in cash flow from operations. It will not need to raise cash or sell shares. Instead, it may focus on its steady execution.
Autodesk has an industry-leading product and platform that architectural customers require. Despite uncertainties ahead, the company is highly resilient.
For example, it expects second-quarter revenue of $1.22 billion to $1.24 billion. In addition, it experienced a pullback in business during the early part of the invasion of Ukraine in Europe. Fortunately, the business rebounded quickly and strengthened by the end of the quarter.
The software firm enjoys strong demand from multiple vectors. This includes infrastructure, construction, and general building design markets. Customers in the manufacturing segment also require Autodesk’s solution.
To build its software offerings, Broadcom (NASDAQ:AVGO) said it would buy VMware (NYSE:VMW) for $16 billion. This will complement Broadcom’s hardware offerings. It already rewarded investors with a strong second quarter and a generous stock buyback program.
In the second quarter, Broadcom posted revenue of $8.1 billion, up by 23% year over year. It earned $5.93 a share on a GAAP measure. It bought back 5.6 million shares worth $3.29 billion.
In the third quarter, it expects to report revenue of around $8.4 billion. Its new share repurchase program authorizes up to $10 billion in stock. This is incremental to the $3 billion that remained in its current authorization.
VMware will complement Broadcom’s public and private cloud business. As customers transition from a perpetual license to a subscription, they will consider VMware’s software, which offers vSAN, vSphere and vRealize. As mentioned with Adobe, tech stocks really can benefit from these kinds of models.
Furthermore, Broadcom will realize synergies from VMware’s direct sales force. This will result in stronger sales and higher profits from software.
Electronic Arts (EA)
Electronic Arts (NASDAQ:EA) enjoys strong bookings, which will translate to growing earnings in the quarter and the year ahead.
In the last quarter, EA posted a GAAP EPS of 80 cents. Q4 bookings increased by 17.4% to $1.75 billion. Net bookings rose by 21% year over year to $7.5 billion.
In Q1/2023, net bookings will top up to $1.25 billion. For the fiscal year of 2023, net bookings are up to $8.15 billion.
The company is managing profitability effectively. It is sustaining its football franchise well by having over 300 licenses related to content. With over 150 million player accounts, EA has plenty of monetization potential ahead.
EA’s Lord of the Rings game and FIFA Mobile have strong potential. Mobile has a total addressable market of 3.5 billion players. It delivers live services to that audience. It will entertain its audience with FIFA and Apex Legends. When EA launches Lord of the Rings, expect its mobile gaming audience activity to spike higher.
Meta Platforms (FB)
Hurt by new mobile advertising restrictions, Meta Platforms (NASDAQ:FB) is among the tech stocks that are transforming.
Those restrictions, plus the economic slowdown ahead, hurt advertising revenue. Now that FB stock is down to reflect those headwinds, investors should count on steady active user traffic.
Meta will have high capital expenditures to build its artificial intelligence and machine learning. This will weigh on profitability for now but will pay off later. Meta must build its gaming and software library to support Oculus Quest. Once its AI and machine learning software reach major milestones, the company will slow its spending.
Meta did not scale its VR headset in a meaningful way yet. It needs to lay the groundwork by developing the technology first. By 2030, its metaverse will become a major contributor to overall results. Until then, investors will count on Facebook, Instagram, and Whatsapp user activity to support the core business.
Netflix (NASDAQ:NFLX) is another of the tech stocks that could benefit from a partial reevaluation. Its near-term challenge is cutting down on the production of unpopular content.
The more time viewers spend scrolling for the material they do not watch, the more frustrated they become.
Netflix needs to identify unappealing content. It has a chance to cut costs while reinvesting the savings into its successful shows. For example, Ozark enriched the viewer experience with extra production and cast interviews.
To slow last quarter’s subscriber decline, Netflix may cut the number of movie releases and increase bigger blockbuster hits. It already has laid off around 150 people. As it re-allocates its resources toward movies likely to resonate well with its audience, Netflix could revive its subscriber growth.
Netflix is an expanding addressable market in developing countries, but it has two groups of viewer penetration. One group pays us while the other does not. It will address the latter group by cracking down on password sharing. If it sustains viewership levels and grows memberships, it will win back investor confidence.
More recently, the CEO told workers they must be in the office for at least 40 hours a week. This is the CEO’s indirect way of forcing staff to quit if they did not like this policy.
This would save Tesla from paying severance while improving middle-management productivity. The company also will likely hire staff at factories as it ramps up production globally.
Tesla has a first-mover advantage against all other automotive firms. Consumers relate to electric vehicles by thinking of the Tesla brand first. The company signed a supply deal with Vale (NYSE:VALE) for low-carbon nickel. It has a moat because of its low-cost production advantage.
While competitors may benefit briefly from tax credits, Tesla is already re-aligning its costs to sustain operating margins.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.