The NASDAQ-100 Technology Sector index has had a remarkable run over the last five years, delivering a return of 237%. But year to date, the rotation from expensive growth stocks to value stocks has led to higher volatility for many tech names that outperformed in 2020.
Two stocks that are bucking that trend are Alphabet (GOOG 0.14%) (GOOGL 0.10%) and Dell Technologies (DELL 2.77%). Here's why these stocks could have more upside in 2021.
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1. Alphabet
Alphabet's stock price has trounced the broader market, up 42% year to date. The online tech titan initially reported sluggish growth in 2020 as the pandemic slowed digital ad spending, which drives the bulk of Google search and YouTube revenue. But ad spending has been recovering strongly over the last few quarters.
In the first quarter, revenue grew 34% year over year, on top of 15% in the year-ago quarter. More people are relying on search to find vaccine information and look for jobs, which is boosting Google's advertising revenue in the search business. YouTube ad spending is also picking up as more people are turning to the video platform to watch reviews and shop for products.
During the Q1 earnings call, Alphabet's Chief Business Officer Philipp Schindler said, "We've seen great momentum in TrueView for Action ads, with a number of advertisers using the format doubling over the past year."
Alphabet is also a leader in the booming cloud services market, where Google Cloud revenue surged 46% year over year. What's notable about this performance is that Google Cloud grew faster than the cloud market overall. This is an important market share gain for Google, which continues to trail the leaders, Microsoft and Amazon.
Overall, Alphabet has a wide competitive moat, with a massive base of users who rely on Gmail, Google Maps, search, and YouTube every day.
Of course, government regulation is a long-term threat here. Alphabet just reached a settlement with regulators in France, where it will pay $270 million in fines over an antitrust dispute. But this regulatory risk seems to already be reflected in the stock's valuation.
Analysts expect this FAANG stock to grow earnings per share at an annualized rate of 21% over the next five years, which is more than enough to support a forward P/E of 28.7 at the stock's current price.
2. Dell Technologies
Many investors remember Dell from the glory days of the PC boom a few decades ago. While the company benefited from a healthy PC market in the first quarter, the reason investors should consider buying shares is the momentum Dell is experiencing with its information technology business, along with other catalysts on the horizon.
After posting a 1% decline in revenue through the first half of fiscal 2021, Dell has seen revenue accelerate to 9% in fiscal Q4 2021 and 12% in fiscal Q1 2022.
"There has been a substantial acceleration in digital transformation across the globe and you can see it in our results with record first-quarter revenue of $24.5 billion," Chief Operating Officer Jeff Clarke said in the earnings report.
The stock has doubled off its lows from a year ago, reflecting the company's improving outlook coming out of the pandemic. But it could still head higher, for a few reasons.
First, Dell is rapidly paying down its debt, which stood at $37.9 billion at the end of April, down from $41.6 billion at the end of January. Debt reduction not only lowers financial risk for Dell, but it also boosts earnings growth, since lower debt also means lower interest expense. The recent reduction in debt lowered interest expense by approximately $162 million last quarter and contributed to a 59% jump in net profit.
Dell is also spinning off its 81% interest in VMware, which will provide proceeds of $9.3 billion to $9.7 billion to accelerate the reduction in debt.
Ultimately, valuation is what counts. The stock trades at a low price-to-earnings (P/E) multiple of 12 times forward earnings estimates. A combination of improving business growth, lower debt, and a cheap P/E make this a top tech stock to consider buying right now.
