Tech stocks are behind some of the biggest innovations of the past twenty years, including smartphones and computers. Because of their diverse growth opportunities, it's tough to distill the massive tech market into just a few picks. But here are my three personal favorites: Amazon (NASDAQ:AMZN), Facebook(NASDAQ:FB), and Microsoft (NASDAQ:MSFT).
Amazon is a top pick for one simple reason -- AWS (Amazon Web Services). AWS is the world's largest cloud infrastructure platform, with an annual run rate of over $11 billion. It provides storage, remote computing power, and analytics to companies, and lets developers create and host their apps in the cloud.
AWS is now Amazon's fastest growing and most profitable business unit. Its revenue surged 55% annually and accounted for 10% of its total revenue, while its operating income more than doubled to $861 million. That bottom line growth offset weaker growth at Amazon's marketplace businesses, and enabled the company to post an operating profit of $575 million for the quarter.
AWS' scale and the addition of new data centers and services every quarter makes it tough for any rival, including second-place Microsoft (NASDAQ:MSFT), to keep up. Its rising profitability also enables Amazon to expand its e-commerce and Prime ecosystems with low-margin or loss-leading efforts like streaming video, same-day deliveries, and cheaper smart home devices. This expansion enables Amazon to conquer the cloud and e-commerce markets simultaneously -- making it a top tech play for 2017 and beyond.
Facebook is already the world's largest social network, but it's still growing rapidly. Its monthly active users (MAUs) rose 16% annually to 1.79 billion last quarter, and it's still reaching into untapped markets with solar-powered drones and "zero-rated" apps for users in rural areas and developing markets. Facebook is even reportedly willing to censor its network to gain access to the massive Chinese market again.
Meanwhile, Facebook's Instagram, WhatsApp, and Messenger apps give users an "illusion of choice" between social apps, but actually tether all them more tightly to its data-mining and ad delivery ecosystem. All that data supports Facebook's expansion into adjacent markets, like e-commerce, enterprise communications, app-displacing chatbots, and even virtual reality.
Those moves all widened Facebook's moat against Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, which repeatedly failed to counter Facebook's ability to gather data from users' social connections and interactions. That ecosystem growth makes Facebook another key tech stock to watch next year.
After resting on its laurels for years under former CEO Steve Ballmer, Microsoft finally became a forward-thinking company again under current CEO Satya Nadella. Unlike Ballmer, who milked Microsoft's cash cows of Windows and Office for far too long, Nadella had Microsoft invest heavily in the cloud and mobile markets.
To counter Android, Nadella made Windows 10 a "universal" cloud-tethered OS for PCs, mobile devices, and gaming consoles. To reduce fragmentation across different versions of Windows, he offered Windows 10 as a free upgrade for most Windows 7 and 8 users for a year. He also introduced Continuum, a feature which turned Windows 10 Mobile smartphones into full PCs via a Display Dock, and expanded the Surface lineup to include 2-in-1 laptops and sleek all-in-one PCs.
For the first time in years, Microsoft also leapfrogged Google and Apple (NASDAQ:AAPL) in terms of innovation with its mixed-reality HoloLens headset, augmented reality apps, and holographic design features for Windows 10. I believe that as Microsoft unveils more of these features next year, it could move ahead of Google and Apple on the tech curve -- sending those two mobile leaders scrambling to catch up.
The key takeaway
Amazon, Facebook, and Microsoft could impress tech investors next year, but investors should also be aware of their weaknesses. Amazon will likely face questions about its lofty P/E ratio, high logistics expenses, and the falling prices of cloud services, and analysts could fret over Facebook and Microsoft's higher spending on new technologies. Therefore, investors should do some careful due diligence before deciding if these stocks actually suit their long-term investing goals.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Apple, and Facebook. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.