Investors just starting out are often deluged with information about which stocks are best, making it difficult to find quality stocks that can serve as a foundation for a portfolio.
If you're new to investing, fear not. Here are three tech stocks with strong business models, excellent financials, and growth opportunities that can jump-start an investor's stock-buying journey.
1. Amazon: The dominant e-commerce company
Amazon (AMZN -1.44%) is one of the most prominent companies globally and is the leading U.S. e-commerce retailer, controlling roughly half of all the e-commerce business in the United States. But Amazon is a conglomerate of sorts and manages businesses outside of the e-commerce arena as well, including segments dealing with cloud storage and computing, video content, brick-and-mortar grocery stores, smart appliances, and more.
Analysts estimate Amazon will generate $476 billion in revenue in 2021, growing 23% over 2020's total. This growth rate could easily continue as Amazon operates in growing industries such as e-commerce and cloud computing. The cloud computing market alone is expected to total $332 billion this year and Amazon is one of the top players in that industry.
Amazon has the spare funds and ability to enter new industries and find opportunities, with a strong balance sheet that currently holds $90 billion in cash and marketable securities. A new investor can take comfort in Amazon's collection of leading businesses, and the cash to provide both financial safety and potential opportunity in the future.
Despite its seemingly high share price, the stock is reasonably valued, trading at a price-to-sales ratio of 3.4 (a quite reasonable figure for a tech growth stock) using analyst revenue estimates for 2021. That's the lowest it's been since May 2020.
2. Alphabet: The search engine king
Alphabet (GOOG -0.44%) (GOOGL -0.55%) is a technology conglomerate known best for Google Search, the internet search engine that maintains a 92% share of global searches. It also owns YouTube, Google Cloud (a cloud-computing business), several enterprise software operations, Google Maps, Waymo self-driving cars, and more.
Like Amazon, Alphabet is a large business and it expects to bring in $250 billion in revenue in 2021, a 37% increase over 2020's total. A Significant majority of Alphabet's revenue (about 92%) comes from Google ads, YouTube, and related Google services.
Its recent 2021 second-quarter earnings showed that the ad business is as strong as ever for Alphabet. Google Ads revenue for the quarter grew 68.9% year over year to $50.4 billion, with YouTube ads revenue jumping 83.4% year over year and contribute about $7 billion of that total. It should be noted that these percentage increases are in comparison to a 2020 quarter that was weighed down by the adverse economic effects of the growing COVID-19 pandemic.
Unlike Amazon, Alphabet's P/S ratio of 7.5 is near its highest level in a few years. However, Alphabet's continued growth and the company's dominant market positions add up to a stock that could continue to grow steadily over the long term.
3. Nvidia: Leading tech into the future
Nvidia (NVDA -1.51%) develops graphics processing units (GPUs) and system semiconductor chips that are used in gaming and a variety of commercial uses, including artificial intelligence, cloud-computing and data-center storage, autonomous driving, high-performance computing, and more. These are all technology-intensive industries widely expected to grow further in the coming years and likely to require Nvidia products.
The company is forecast to generate $25 billion in revenue in its fiscal 2022 year (which roughly corresponds to the 2021 calendar year), a 49% increase year over year. Nvidia generated $2.6 billion in free cash flow from its business on $6.5 billion in revenue in Q2, a conversion rate of 40%, suggesting the business is very profitable.
Nvidia made waves in its industry in September 2020 by announcing a blockbuster deal to acquire Arm Holdings, a chip designer, for $40 billion. Regulators are currently reviewing the deal; if it closes, Nvidia will gain access to a lot of intellectual property in the form of chip designs (and the rights to them), becoming even better positioned for a technologically intense future.
This year, the stock price has done well, up 59% year to date, and it is currently trading at a P/S of 21 (using Nvidia's expected revenue for the year). This is the highest valuation the company has had since the pandemic began, so the stock is commanding a premium price. Interested investors might want to wait for a potential pullback on price before buying in or buy now and hold the stock as the business grows into its relatively lofty price.
Here's the bottom line
Beginning investors would be well served by trying to build their portfolio around quality stocks from quality companies. Amazon, Alphabet, and Nvidia are robust businesses that generate a lot of cash and have opportunities to continue growing despite their already large size. That makes these three tech stocks a good place to start.