Technology stocks are often known for their nose-bleed valuations, immense volatility, and propensity to have their business models disrupted. Some of the greatest investors of all time, including Warren Buffett, have a well-known disdain for the sector. In general, technology stocks may not be suitable for every portfolio -- in particular, those seeking income, or looking to minimize risk.
But not every tech firm fits the stereotype of the high-flying speculative play. In particular, Apple (AAPL 1.27%), Microsoft (MSFT 0.37%), and Google (GOOG 0.74%) (GOOGL 0.55%) may be appealing to investors of all kinds. Below, three Motley Fool contributors explain why these companies could belong in any portfolio.
Joe Tenebruso (Apple): Are you searching for a high-growth investment? If so, would you be interested in learning more about a company that just grew revenue by 30% and earnings per share by 48% in its most recent quarter?
Or are you more of a value-type investor? Then maybe you'd prefer a quality business currently trading at a price-to-cash flow multiple of only 12. Would you find that tempting? Maybe you're more interested in income-generating investments. In that case, how about a stock with a respectable current dividend that's likely to grow substantially in the years ahead – would you find that appealing?
Astute investors may have guessed that in all three cases, I'm referring to Apple. The tech titan is worthy of consideration in any portfolio because it offers so much to so many different types of investors. Personally, I consider myself a best-of-breed type investor. Within Tier 1, the real-money portfolio I manage for The Motley Fool, I seek out and invest in the world's elite businesses. And what I see in Apple is a dominant Tier 1 enterprise with a wide moat built upon best-in-class products and services, a powerful and expanding ecosystem, a brand beloved by millions, and a talented management team. That's why Apple is a core position in Tier 1, and why Fools may wish to consider Apple for their own portfolios.
Bob Ciura (Microsoft): Microsoft is a tech stock that is right for any portfolio. The stock price is up 53% in the past two years, which has handily outperformed the S&P 500 Index by almost 20 percentage points in that time. Microsoft also pays a solid 3% dividend yield. And, it's a cheap stock, trading at a significant discount to the broader market. This all means that Microsoft has something to offer all investors — growth, value, and income investors alike.
Microsoft is growing strongly, due to solid results across both of its major businesses, hardware and software. Microsoft sold 10.5 million Lumia phones last quarter, and phone hardware revenue hit $2.3 billion. In addition to Lumia's success, Surface revenue grew 24%, and Microsoft sold 6.6 million Xbox consoles last quarter.
Separately, Microsoft's cloud businesses are thriving. Commercial cloud revenue soared 114% and reached a $5.5 billion annual run rate last quarter, due to strong growth of Office 365 and Azure. Bing positively contributed to Microsoft's results as well, as search advertising revenue grew 23% year over year. In all, Microsoft's revenue and gross profit grew 15% and 5%, respectively, over the past two quarters.
Microsoft generates a lot of cash. The company raked in $9.9 billion of free cash flow in the past two quarters combined. This is more than enough to pay its 3% dividend, which accounted for $4.8 billion. The company produces plenty of cash flow to reward shareholders with both dividends and share buybacks. Microsoft bought back $5 billion of its own stock in the same time. This allows the company to provide shareholders a nice yield, as well as help boost earnings growth with share buybacks. This should keep both income investors and growth investors happy. Plus, Microsoft isn't an expensive stock: It trades for just 17 times earnings, which is a discount to the valuation of the entire stock market. For all these reasons, Microsoft is a great fit for any portfolio.
Sam Mattera (Google): Even the most successful technology firms face intense competition. Few, however, are as dominant as Google. When it comes to search, Google has a virtual monopoly, with about two-thirds market share in the U.S., and over 90% in Europe. Its closest competitor, Microsoft, has invested billions in Bing, yet has surprisingly little to show for it. Although Google's business faces potential disruption from social media firms, and others competing for digital ad dollars, it's hard to imagine any company displacing Google search.
Google is in good hands. It consistently ranks among the best places to work, and its management team is well-aligned with shareholders. It's also an established giant and a growth stock. Last year, its revenues rose 19% on an annual basis, while its diluted earnings per share rose more than 10%. It doesn't pay a dividend, which may incline income-seeking investors to shy away, but it easily could: Google has roughly $65 billion in cash, or about 17% of its market cap. It continues to generate significant free cash flow, nearly $3 billion alone last quarter.
Google has been an under-performer in recent months: Over the last year, its stock is down more than 8%. But its business remains sound, and investors looking to add a tech stock to their portfolio could be getting it at a bargain.
