Stocks are one of the best wealth-building tools available, and with the new year approaching, there's no better time to put some money to work.
Whether you are new to stocks or a veteran looking for new investment ideas, here are three tech stocks that I would feel comfortable buying today.
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Microsoft
Microsoft (MSFT -2.45%) has delivered a stellar return of 280% over the last five years, but the company's growth opportunities in cloud services should pave the way for further gains.
Microsoft continues to experience double-digit revenue growth with impressive results from its intelligent cloud segment, which has become the largest business for the software giant. The key driver here is Microsoft Azure, where revenue jumped 48% year over year in the most recent quarter.
Azure continues to win new business from large corporations that are increasingly relying on cloud computing to manage Internet of Things devices securely, build cloud-based applications, and process data using artificial intelligence, among other services.
Elsewhere, Microsoft's consumer products continue to perform well. The number of monthly active devices using Windows 10 grew by double digits year over year in the fiscal first quarter. In gaming, Xbox content and services revenue jumped 30% year over year ahead of the November launch of the Xbox Series X/S game console. The gaming segment represented just 8% of total revenue in fiscal 2020, but the Xbox business could begin to grow significantly over the next decade based on the prospects for the Xbox Game Pass subscription service, which already has 15 million members.
Microsoft is a highly profitable business and has an enviable position as a software-as-a-service provider. At a price-to-free cash flow (P/FCF) ratio of 33, the stock is not too expensive relative to Microsoft's underlying growth and should deliver satisfactory returns for many years.
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Amazon
Amazon (AMZN -1.65%) is dominant in e-commerce, but even though it's a household name at this point, it's still has plenty of growth potential. Despite years of growth, e-commerce still represents less than 15% of total retail spending.
This holiday should be the first quarter that Amazon exceeds $100 billion in revenue in a three-month period. Amazon reported $96 billion in revenue in the third quarter, for an increase of 37% year over year.
More people are shopping online, which plays to the strengths of Amazon's vast selection, fast shipping, and excellent customer service. The consensus analyst estimate has Amazon hitting $119 billion in revenue for the fourth quarter, representing an increase of 36% year over year.
Amazon has seen higher Prime member engagement recently, as people take advantage of online grocery delivery from Whole Foods Market. Management also stated in the last earnings report that international engagement with Prime Video grew 80% year over year in the third quarter, a testament to the irresistible pull of a Prime membership.
If we like Microsoft for its growth prospects in cloud services, we should love Amazon even more, since Amazon Web Services controls the No. 1 spot in the cloud infrastructure services market and makes up most of Amazon's operating profit.
Amazon is more expensive than Microsoft, trading at a P/FCF ratio of 64, but Amazon is growing much faster and still has a long runway of growth. Amazon is one of my largest holdings, and I would be comfortable adding more shares at today's price levels.
Unity Software
Unity Software (U -1.06%) is the backbone of many top video games that are made for mobile, console, and PC. It is the leading platform for creating and operating interactive real-time 3D content, and it's growing fast, with revenue soaring 53% year over year in the third quarter.
The stock just completed its initial public offering in September and has already climbed 127%. It's a high-flyer that could be volatile in the short term, which is sometimes par for the course with growth stocks, but there are good reasons why investors are so bullish.
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An investment in Unity stock is partly a bet on the continued growth of the $175 billion video game industry, but it's also a play on the general use of software to design and create products throughout the economy. In addition to assisting game creators, Unity's platform is also used by filmmakers, industrial designers, artists, architects, and other professionals.
The company estimates that the addressable market for its platform is currently about $29 billion. But the exciting thing about Unity is that management sees potential for more use cases beyond what the platform currently serves. Some of these new use cases include autonomous driving simulation and augmented reality applications.
The main benefit Unity offers clients is similar to what is driving growth for Microsoft's cloud business -- a cost-effective and time-saving solution compared to alternatives. For example, with Unity, game creators only have to create a game once before launching it across several platforms, such as PC, Nintendo Switch, Xbox, PlayStation, mobile, and virtual reality.
Unity also offers solutions to help game creators monetize their content with in-game purchases and advertising, which is how more video game companies are padding their revenue these days.
Although the growth potential is massive, investors may only want to start a small position in the stock right now. Unity is richly valued with a market value of $42 billion. That's a steep valuation of 48 times its trailing 12-month revenue of $674 million. However, the company's growth should justify that valuation over time, but remember that the shares could be bumpy in the near term.
