There have been few market downturns in recent memory as exasperating as the one we're currently experiencing. The S&P 500 and the Nasdaq Composite indexes are firmly in bear market territory for the year, and with the Dow Jones Industrial Average down more than 18%, it's hovering just above that threshold. Investors are wondering how far down the bottom really is.
It's clear that patience is going to be necessary. The Federal Reserve just raised interest rates by 75 basis points for the third time in a row and has signaled that equally steep increases are coming. Those raises are designed to slow the economy in an attempt to cool inflation, and investors might be tempted to just sit on the sidelines to wait for the dust to settle. But that could be a mistake.
These three tech stocks will offer the best potential of generating the greatest returns for patient investors when that upturn hits.
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1. Amazon
Cynics might say that Amazon (AMZN 1.30%) announcing it will hold a second Prime Day event in October is a sign that the e-commerce giant is trying to prime the sales pump to offset slackened growth.
Second-quarter revenue was $121 billion, up 7.2% compared to a year ago , which on its face might appear as good news. But that number was actually down sequentially from the 7.3% gain in the first quarter and represents the slowest growth in over 20 years. And that was despite including Amazon's traditional summer shopping extravaganza. Another Prime Day in the third quarter could boost otherwise lagging sales, though there is the risk of diminished returns from having too many "doorbuster" events.
Still, Amazon remains the first place most online shoppers turn to, and it should easily be able to maintain that dominance in the years ahead, but the real jewel in Amazon's crown is its cloud services business, which continues to bolster its bottom line. Amazon Web Services (AWS) notched another quarter of solid, double-digit revenue growth, jumping 33% to $19.7 billion.
AWS is the leader in cloud services, has been profitable for years and operating income of $5.7 billion was up 36% year over year. As businesses continue to move their data online, AWS will keep Amazon growing and well ahead of the competition.
2. AT&T
Telecom giant AT&T (T 1.17%) is also a good bet on the future, despite the near-term outlook being cloudy. Even CEO John Stankey is offering up sobering forecasts for the economy, telling a recent Goldman Sachs conference that he expects a trying period of stagflation where the economy falters but inflation persists.
AT&T reported in July that its customers were paying their bills two days later than a year ago, an indication things could sour further if the economy spirals down more. And it was why it lowered its free cash flow guidance by $2 billion. It's not surprising AT&T's stock is down 14% in 2022.
Yet the telecom continues to add more customers while rival Verizon is losing them. Where AT&T added 619,000 postpaid customers in the first quarter and another 813,000 in the second, Verizon was losing 292,000 and 215,000, respectively. Having shed its Warner Media entertainment division to streamline operations, AT&T can now focus on rolling out its 5G networks.
It's been about a decade since telecom providers meaningfully improved wireless download speeds, so the ongoing upgrade of wireless infrastructure to support 5G speeds helps AT&T as it drives further demand in the smartphone market. That will ultimately lead to an upturn and profitability improvement in the telecom's business to support its generous dividend that is currently yielding 6.9% annually.
While some are concerned that's not sustainable, especially as AT&T had said pre-spinoff it wants the payout to be in the range of 40% to 43% of free cash flow, the telecom is on a full court press to cut debt while maintaining a "good and competitive dividend," which CEO John Stankey says they have now. For investors, the dividend will also help offset any lost capital appreciation in the meantime.
3. Microsoft
Microsoft (MSFT 1.65%) is best known for its ubiquitous Windows operating system, but it is now a major cloud services provider whose Azure platform is second only to Amazon's AWS. The migration of businesses to the cloud has led Azure to post 20% revenue gains in its fiscal fourth quarter to $20.9 billion, making the division Microsoft's biggest revenue contributor.
In comparison, Productivity and Business Processes -- which includes Microsoft's Office 365 suite, LinkedIn platform, etc. -- is second at $16.6 billion. Meanwhile, the segment including Windows and gaming is third with $14.4 billion in revenue.
Yet Microsoft continues to invest in those other segments, too, as demonstrated by its intention to purchase Activision Blizzard for $68.7 billion, which will bring the premiere video game stock under its very broad umbrella. Also, Microsoft's Xbox game console remains a potent force in the industry, even if it is cyclical in nature.
By having diversified revenue streams, the company offers some downside protection for its operations even if its stock is down 30% year to date. It has plenty of opportunity for growth across all of its segments; with analysts forecasting that Microsoft can still expand earnings at 15% annually for the next five years, this is certainly a stock to buy now.
