The markets have rallied about 16% year to date and that has pushed many tech stocks to new highs, even though trade tensions between the U.S. and China have created uncertainty about the economy in the short term.
While no one really knows where the markets will be in a year, there are always opportunities in the technology sector for long-term investors to find great growth stocks. With that said, here's why Microsoft (MSFT -0.66%), Nintendo (NTDOY 0.66%), and Sony (SONY -1.68%) are my three favorite tech stocks to buy in September.
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Ride this cloud past the trade war
It's hard to believe that just eight years ago, Microsoft stock was trading at a cheap trailing price-to-earnings (P/E) ratio of 10, as revenue growth was bogged down by slowing PC sales. Investors avoided the stock because it was difficult to imagine where the growth was going to come from given the few opportunities to grow sales by selling more copies of Windows and Office software.
Since 2011, the stock has soared 425% and now commands a premium valuation of 26 times forward earnings estimates. CEO Satya Nadella, who took over in 2014, has turned Microsoft into a great growth stock again by steering the company toward the massive opportunity of cloud computing services. Despite the rapid rise in the shares, I believe the stock is still a buy because revenue and earnings grew at double-digit rates in fiscal 2019 (which ended in June), and there's still a tremendous opportunity for Microsoft to benefit from the rapid of adoption of cloud services.
In the fourth quarter, revenue from the commercial cloud business surged 39% year over year and reached $38 billion for the year, which is 30% of total revenue. Microsoft signed several multimillion-dollar cloud agreements, particularly with respect to its fast-growing Azure enterprise cloud service. Revenue from Azure increased 64% year over year in the fourth quarter, which is a slight deceleration from previous quarters but still a terrific growth rate.
The cloud is benefiting the company on the consumer side, too, with growth in subscriptions for Office 365. Additionally, Microsoft is making a significant investment in Project xCloud -- a video game streaming service, where cloud gaming is expected to revolutionize how gamers play over the next decade. There are many other ways Microsoft is leveraging its capabilities in the cloud to drive growth, including Internet of Things.
Microsoft's network effect advantage with its Windows services, combined with its growing clout in cloud services, puts the company in a very powerful competitive position. Investments in high-growth areas, such as cloud, artificial intelligence, GitHub, business applications, LinkedIn, and other areas will cause higher operating expenses in the short term, but management still expects to deliver double-digit operating income growth in fiscal 2020.
Analysts expect revenue and earnings to grow by 11% and 10%, respectively, in the next year. Regardless of what happens with the trade war or other economic issues in the short term, Microsoft has enough growth opportunities to power your returns over the next decade and beyond.
A family-friendly game maker
Nintendo has made a big comeback over the last few years with its Switch hardware. The company has sold nearly 37 million units of Switch through June, with a forecast to sell an additional 18 million units in fiscal 2020 (which ends in March). The stock has more than tripled in value over the last five years, but there could be a lot more gains to come.
With the Switch and the new effort to push heavily into the $68 billion mobile game market, Nintendo is making its first serious push into sales of digital content, including subscriptions to Nintendo Switch Online, add-on content sold in-game, and downloadable versions of games. Digital sales made up a quarter of Nintendo's revenue last year, and further growth in digital sales, which generate higher margins than hardware, could drive profits higher.
Management is steadily building its digital sales capabilities by releasing a few mobile titles each year. These are mobile games based on Nintendo's most valuable intellectual property like the classic Mario character. The Japanese game maker is also looking to expand into the broader world of entertainment with a Mario movie in development with Illumination, the animated film studio behind hits like The Incredibles and Despicable Me.
The outlook for near-term growth is light, with management calling for revenue to grow only 4.1% in fiscal 2020. That could prove conservative if the upcoming Switch Lite sells better than expected through the holidays. The stock trades at a forward P/E multiple of 26 times based on earnings guidance, but Nintendo also offers investors a forward dividend yield of 1.90%. I believe it's worth paying up for the stock because Nintendo has so much potential across digital sales growth and mobile games.
A hidden gem in entertainment
Sony has been performing very well of late. The stock has nearly tripled over the last five years, stemming from growth in its gaming and music businesses. Last year, operating income across both segments nearly doubled, as sales of digital content pushed margins higher.
The rest of the company has been a mixed bag. Sony makes money from various segments, including financial services, consumer electronics, motion pictures, and semiconductors. These other segments haven't delivered consistent revenue growth, which is understandable given the cyclical nature of these products.
The crown jewels of Sony are the PlayStation gaming business and the music segment. Some investors also see a lot of potential with the Pictures segment, in which Sony owns the film rights to 100 years' worth of cinematic history, including the rights to the Spider-Man franchise and over 900 other Marvel characters.
The odd mixture of highly valuable entertainment businesses sitting next to capital-intensive, low-return segments like semiconductors and imaging products has drawn the attention of activist investor Dan Loeb, who wants Sony to spin off some of these other assets. Loeb has also called for Sony to sell its stake in the music streaming platform Spotify Technology, in favor of reinvesting the proceeds in gaming, music, and movies.
Sony contends that it's more valuable to retain the synergies that all these businesses have under one corporate roof. Whether spinoffs happen or not, the stock is still a worthy investment candidate, trading at a modest valuation of just 14 times next year's earnings estimate.
