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3 Top Tech Stocks to Buy in January

By Harsh Chauhan – Jan 7, 2022 at 9:06AM

Key Points

  • Apple's dominance of the 5G smartphone market is going to be a tailwind for the stock.
  • Twilio is the leader in the cloud-based contact center market, which is growing at a rapid pace.
  • Take-Two Interactive's robust pipeline of games could help it seize a massive opportunity.

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These tech stocks should be able to take advantage of secular growth trends making them worth buying for the long haul.

Tech stocks got off to a bad start in 2022 thanks to indications that the Federal Reserve could increase interest rates at a quicker-than-expected pace, an event that could reduce the appeal of investing in technology companies given their inflated valuations.

But investors shouldn't forget the fact that this sector was in fine form last year. The Nasdaq-100 Technology Sector index was up nearly 27% in 2021, and it wouldn't be surprising to see tech stocks shrug off the bad start and regain their mojo as the year progresses. That's because the demand for products and services offered by various companies in the tech sector, ranging from smartphones to cloud computing to computers to video games, is expected to remain strong in 2022.

Man and woman looking at a computer screen.

Image source: Getty Images.

As such, it would be a good idea for investors to consider buying Apple (AAPL -0.40%), Twilio (TWLO -0.40%), and Take-Two Interactive Software (TTWO -1.22%), as they are trading at relatively cheap valuations and are on track to win big in 2022 and beyond from secular trends. Let's take a closer look at each of them.

1. Apple

Just like the broader technology sector, Apple stock has also pulled back in the early days of 2022. The stock is now trading at 31 times trailing earnings, which is a discount to the Nasdaq-100 Index's price-to-earnings ratio of 39. This makes Apple an enticing stock to buy right now, though any further dips could give investors a better entry point. It would be a good idea for investors to accumulate Apple stock -- the tech giant could fly higher in 2022 even after registering 34% gains last year, as it is dominating a fast-growing market.

Apple's biggest product line -- the iPhone -- could have another strong year thanks to the growing adoption of 5G smartphones. According to Strategy Analytics, Apple was the leader in global 5G smartphones in the third quarter of 2021, accounting for a quarter of the shipments during the period.

The interesting thing to note here is that competitors such as Xiaomi and Samsung -- which offer lower-priced 5G smartphones compared to Apple's cheapest 5G offering, which starts at $599 in the U.S. -- are behind the iPhone maker in this space. This shows that Apple enjoys strong pricing power in 5G smartphones. IDC estimates that the average selling price (ASP) of an iPhone was $950 last year, compared to $265 for Android devices.

The good news for Apple is that sales of 5G smartphones are expected to jump to 700 million units in 2022 from 500 million units last year. So Apple could witness a nice bump in shipments if it can continue to hold on to its robust share of the 5G smartphone market in 2022. Throw in the high ASP the company is commanding, and it wouldn't be surprising to see iPhone revenue head higher.

This bodes well for Apple, as the iPhone produced 52% of the company's top line last fiscal year. Apple's total revenue increased 33% in fiscal 2021, and the iPhone was a key driver of this growth, as the company's revenue from this product increased 39% year over year. With Apple's iPhone shipments expected to increase 30% in the first half of 2022 and the company reportedly aiming to ship 300 million units this year, compared to 2021's estimate of 240 million units, the tech titan looks set to head higher given its impressive pricing power.

2. Twilio

Twilio stock has been crushed over the past year, losing 31% of its value despite reporting robust revenue growth quarter after quarter.

TWLO Chart

TWLO data by YCharts

For instance, the company's revenue in the third quarter of 2021 increased 65% over the prior-year period to $740 million, driven by an increase in the number of active customer accounts and higher spending by customers. Twilio can continue to clock such terrific growth in 2022, as the demand for cloud-based contact centers is set to keep increasing this year and beyond.

Twilio allows organizations to deploy remote customer care centers that allow them to serve customers from anywhere, thereby reducing the costs associated with setting up and operating physical contact centers. Additionally, cloud-based contact centers are quick to set up since customer service agents simply need to install an application on their computers.

As a result, the demand for cloud contact centers is growing at a terrific pace. According to a third-party estimate, the cloud-based contact center market could grow at an annual pace of nearly 26% through 2026, generating more than $45 billion in revenue. So Twilio has a lot of room for growth in the long run, as it has generated $2.55 billion in revenue over the trailing 12 months.

What's more, Twilio is the leader in the communications platform-as-a-service market with a 38% share, according to third-party estimates.

All of this tells us that investors may be making a prudent decision by buying Twilio stock right now, as it is trading at 15.6 times sales. For comparison, Twilio had a price-to-sales ratio of 17.5 in 2021 and 31 in 2020. The massive drop in the stock price has made Twilio relatively cheap, giving savvy investors an opportunity to buy this fast-growing tech company that looks primed for upside in the long run.

3. Take-Two Interactive Software

The global video games market was worth an estimated $176 billion last year as per Newzoo's estimates, and it is expected to generate nearly $205 billion in revenue in 2023 as more people start gaming. Take-Two Interactive is in a solid position to take advantage of this growth thanks to its impressive portfolio of gaming titles across different platforms.

Take-Two publishes games on personal computers (PCs), consoles, and mobile through its different studios. More importantly, the company's games are highly popular, as evident from the fact that it has 12 franchises that have sold more than 5 million units. For instance, Take-Two's Grand Theft Auto franchise has sold more than 355 million units, while the Red Dead Redemption series has sold over 62 million units.

Looking ahead, the company has a solid pipeline of titles that could help it seize the massive end-market opportunity it is sitting on. Take-Two plans to launch 23 core titles (games with many hours of gameplay and immersive content) over the next two fiscal years, along with 20 mobile titles and nine new iterations of existing titles.

Additionally, Take-Two should benefit from the new console cycle since it gets 75% of its revenue from this platform. The current console cycle is in its early stages of growth, which is why sales of the PlayStation 5 and the Xbox Series X/S are expected to take off over the next few years. This explains why the company's earnings are expected to improve at a nice pace going forward.

TTWO EPS Estimates for Current Fiscal Year Chart

TTWO EPS Estimates for Current Fiscal Year data by YCharts

All of this makes Take-Two an enticing video game stock to buy right now, as it is trading at 35 times trailing earnings, compared to the five-year average earnings multiple of 109.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple, Take-Two Interactive, and Twilio. The Motley Fool recommends Nasdaq and recommends the following options: long January 2023 $115 calls on Take-Two Interactive, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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