Many tech stocks fizzled out this year as inflation, rising rates, and other macro headwinds drove investors toward more conservative sectors. However, investors could be leaving a lot of money on the table if they prematurely abandon all of their tech stocks in this volatile market.
Here are three tech stocks -- a cheap dividend play, a growing stalwart, and a pricier hypergrowth play -- that could still be worthwhile investments for three different types of investors.
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1. IBM: The cheap dividend play
For many years, International Business Machines (IBM 0.53%) struggled as the sluggish growth of its legacy divisions consistently offset the expansion of its higher-growth cloud services. But last November, it spun off its slower-growth managed infrastructure services unit as Kyndryl Holdings, then pivoted its remaining business segments toward the higher-growth hybrid cloud and artificial intelligence (AI) markets.
IBM claims that as a streamlined company, it can grow its annual revenue by the mid-single digits between 2022 and 2024 as its annual free cash flow (FCF) improves by high single digits. It expects that growth to be driven by stable sales of its hybrid cloud software (primarily through its subsidiary Red Hat), cybersecurity software, and consulting services.
Instead of going toe-to-toe against public cloud leaders like Amazon and Microsoft, IBM plans to carve out a niche between the public and private clouds with its open-source hybrid cloud services, which process the data as it flows between the two platforms.
Analysts expect IBM's revenue and earnings to grow 6% and 22%, respectively, this year as it leaves behind Kyndryl's legacy businesses. Those are solid growth rates for a stock that trades at just 14 times forward earnings while paying out a high forward yield of 4.6%.
2. Accenture: The growing stalwart
IBM likely spun off Kyndryl because it couldn't keep pace with nimbler companies like Accenture (ACN 0.53%) in the IT services market. Unlike IBM, Accenture has flourished as one of the world's top IT services companies, and its long-term prospects still look bright.
Accenture's revenue only rose 4% in local currency terms in fiscal 2020 (which ended in August 2020) as many of its clients curbed their IT spending during the onset of the pandemic. However, its local currency revenue grew 11% in fiscal 2021 and accelerated to 24% growth in the first nine months of fiscal 2022 as those headwinds waned. It expects its local currency revenue to rise about 26% for the full year.
Accenture's customer base of over 7,000 clients is broadly diversified across the communications, media, technology, financial services, health and public services, products, and resources sectors -- so it can usually offset a slowdown in one sector with the growth of its other end markets.
The company is also firmly profitable, consistently returns most of its FCF to investors through buybacks and dividends, trades at a reasonable 23 times forward earnings, and currently pays a decent forward dividend yield of 1.4%. Those facts might not dazzle growth-oriented investors, but Accenture's stability makes it a great stock to buy and hold in this tumultuous market.
3. Cloudflare: The pricier hypergrowth stock
Rising rates have crushed pricier growth stocks like Cloudflare (NET 1.89%), which was cut in half over the past 12 months. But this content delivery network (CDN) and cybersecurity services provider is still growing like a weed -- and its steep sell-off could present a great buying opportunity for long-term investors.
Cloudflare's revenue grew 50% in 2020 and rose another 52% in 2021. It expects its revenue to increase 46% to roughly $957 million this year.
It ended the first quarter of 2022 with 154,109 paying customers -- up 29% from a year earlier -- as its adjusted gross margin expanded both sequentially and year over year to 78.7%. Its dollar-based net expansion rate, which gauges its year-over-year revenue growth per customer over the past 12 months, also improved from 119% in 2020 to 125% in 2021.
Cloudflare isn't profitable according to generally accepted accounting principles (GAAP) yet, but it expects to generate a full-year profit on a non-GAAP (adjusted) basis in 2022. By comparison, its slower-growing rival Fastly expects its non-GAAP net loss to widen this year.
When Cloudflare's stock hit an all-time high of $217.25 last November, it hit a nosebleed valuation of $69.9 billion -- or 107 times the sales it would actually generate in 2021. Today, its stock trades at 17 times this year's sales -- which might be a much more stable entry point for long-term investors.
