Please ensure Javascript is enabled for purposes of website accessibility

2 Safe Tech Stocks Set for Growth in the Next 5 Years

By Ryan Downie – Updated Nov 4, 2019 at 3:21PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fortinet and IAC are still in position to grow with the market and provide some cushion to the downside with attractive valuations.

Many investors are concerned about a looming recession. But over-cautious investors could incur significant opportunity cost if the market pullback winds up taking several years to occur.

If investors are too busy protecting their portfolios in case of a downturn, they might miss out on significant growth opportunities, ultimately hampering their portfolio's value. Let's dig into a sector that has some of the most growth to offer: tech.

A person typing on a laptop with speech bubbles indicating chatting online

Image Source: Getty Images

1. Pricing Fortinet's excellent operational performance

Fortinet (FTNT 0.45%) is a software security company, and its shares are down 17% from its all-time highs reached in April 2019. The company's top line has delivered CAGR of 21.3% over the past three years, during which time its operating margin has widened from 3.7% to 14%. Fortinet's 39.2% ROE and 36.1% ROIC far outpace software industry averages, as well as S&P 500 averages, indicating a very efficient business model and execution.

The company's 34.8 EV/EBITDA and 12.0 price-to-book ratio are both substantially higher than industry averages, while the 2.1 PEG ratio and 18.7 price-to-free cash flow are both in line with industry averages. Altogether, these metrics suggest that Fortinet is aggressively priced, but the premium is appropriate, given the strong growth and operational potential.

2. IAC's new structure

IAC (IAC) owns several popular internet and mobile services, and it recently announced plans to fully spin off its remaining shares of Match Group (Tinder, OkCupid, and other dating sites). The announcement has met some resistance, and it requires investors to assess the value of each portion of the business separately. But investors will ultimately gain exposure to those assets by getting into the story today. 

IAC is delivering nearly 10% annualized revenue growth, a healthy 12% operating margin, and ROE and ROIC metrics that slightly lag industry averages. Its 0.91 PEG ratio and 21.0 EV/EBITDA are both enticing. This stock offers an excellent opportunity to gain reasonably priced access to stable tech growth. But it might require investors to stay in a stock that is separating its most exciting portions.

Compared to IAC, Fortinet provides the best combination of operational upside, narrative coherence, and pricing.

Ryan Patrick has no position in any of the stocks mentioned. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.