Many tech stocks tumbled over the past several months as inflation, rising interest rates, and other macro headwinds sparked a rotation toward more conservative investments. But over the long term, selling top tech stocks too early can be far more costly than withstanding a few temporary drawdowns.
Investors should definitely reduce their exposure to unprofitable tech companies that are trading at sky-high valuations. However, they should still buy profitable, evergreen tech companies that trade at reasonable valuations. Let's take a closer look at three stocks that check those boxes: Microsoft (MSFT -1.00%), Taiwan Semiconductor Manufacturing Company (TSMC) (TSM 0.14%), and Nvidia (NVDA 0.03%).
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1. Microsoft
Microsoft's ecosystem is practically inescapable. Windows is the leading operating system for PCs, Office 365 is the dominant office productivity software platform, and Azure is the world's second-largest cloud infrastructure platform after Amazon Web Services (AWS). Microsoft also sells Surface devices and Xbox video game consoles, and it's gradually evolving into one of the world's top video game publishers through big acquisitions.
Under Satya Nadella, who became Microsoft's third CEO in 2014, the aging tech giant expanded its cloud ecosystem, transformed Windows and Office into cloud-based services, and launched mobile apps for iOS and Android. Those changes initially squeezed Microsoft's margins but eventually ushered in a new era of "mobile-first, cloud-first" growth.
That momentum should continue for the foreseeable future. Analysts expect Microsoft's revenue and earnings to grow 18% and 16%, respectively, in fiscal 2022 (which ends this June). Next year, they expect its revenue and earnings to increase 14% and 15%, respectively.
Microsoft's robust growth rates, which should be supported by the ongoing expansion of its cloud services, indicate its stock deserves to trade with a slight premium at 31 times forward earnings. The company's predictable profitability and rising cash flows should also insulate its investors from the macro concerns about inflation and rising interest rates.
2. TSMC
TSMC is the world's largest and most advanced contract chipmaker. It manufactures chips for fabless chipmakers like Apple, AMD, Nvidia, and Qualcomm, and it remains well ahead of its closest competing foundries -- Samsung and Intel -- in terms of node sizes and transistor density.
TSMC is a linchpin of the global semiconductor market, but it faces three near-term challenges:
- The ongoing chip shortage, which has been exacerbated by supply chain headwinds.
- Aggressive spending plans (a planned 33% to 47% capex increase this year) to maintain its technological lead.
- And potential competition from Intel, which aims to regain the lead in the "process race" from TSMC by 2025 through significant investments.
However, TSMC can easily afford its planned capex boost. It also remains far ahead of Intel because it adopted ASML's expensive extreme ultraviolet (EUV) technology -- which is used to etch circuit patterns onto the tiniest wafers -- long before its American counterpart. Its spending should gradually ease as it ramps up its production of 5nm and 7nm chips and rolls out its next-generation 2nm and 3nm nodes.
Analysts expect TSMC's revenue and earnings to grow 29% and 36%, respectively, in 2022. Next year, they expect its revenue and earnings to increase by 15% and 13%, respectively. Those are rock-solid growth rates for a blue-chip tech stock that trades at 20 times forward earnings.
3. Nvidia
Nvidia is the world's largest producer of discrete GPUs. GPUs are usually associated with high-end video games, but they're also used to process complex machine learning and AI tasks in data centers. They're also widely used by the professional visualization and cryptocurrency mining markets.
Nvidia's gaming and data center GPUs have driven most of its growth in recent years. More graphically advanced video games are boosting sales of its gaming GPUs, while a flood of online data is driving demand for its data center GPUs. Cryptocurrency miners have also been using its high-end gaming GPUs and dedicated mining cards to mine Ether and other cryptocurrencies.
Those secular tailwinds boosted Nvidia's revenue 61% in fiscal 2022 (which ended this January) as its adjusted earnings surged 78%. For fiscal 2023, analysts expect its revenue and adjusted earnings to grow another 29% and 20%, respectively.
Nvidia's growth is decelerating against some tough year-over-year comparisons, and the stock might not initially seem like a bargain at just over 40 times forward earnings. However, the chipmaker should continue to profit from the expansion of the gaming, data center, and AI markets for the foreseeable future. Those core strengths, along with its ongoing dominance of the GPU market, should support its current valuations.
