After leading the way for the better part of a decade, 2022 has presented a humbling experience for tech stocks. Three of the world's most valuable companies -- Apple (AAPL -1.22%), Microsoft (MSFT -1.27%), and Alphabet (GOOG -1.10%) (GOOGL -1.23%) -- have all seen their stock prices drop by more than double digits this year. However, these price drops make these three investments no-brainer buys before 2023.
DATA BY YCharts
1. Apple
As the world's most valuable public company, there's no cash cow quite like Apple. In its fiscal year 2022 (FY22), Apple beat Wall Street's expectations by bringing in $394.3 billion in revenue, an 8% increase year over year.
Maybe more important than the revenue is how much free cash flow (FCF) the company managed to have: $111.4 billion. For perspective, here's the FCF for comparable Big Tech companies over that span:
- Microsoft: $63.3 billion
- Alphabet: $62.5 billion
- Meta: $26.4 billion
FCF is important because it's essentially how much money a company has at its disposal. This is important at any time, but especially during times like this, with economic uncertainty and a looming recession. Apple is equipped with all the resources possible to weather any bad economic storm we may experience.
Everyone knows the iPhone reigns supreme for Apple, but the growth of its services business will likely lead the way in the future. Apple's services segment brought in $78.1 billion in revenue in FY22, up over 14% year over year. The Apple ecosystem is hard to leave once you're in it, and as Apple gives its consumers more reasons to stay -- like offering financial services, for example -- it will continue to lead the way for Big Tech.
2. Microsoft
What makes Microsoft a good investment, and ultimately separates it from competitors, is just how ingrained its products and services are into the business world. From cloud services to recruiting on LinkedIn to Excel spreadsheets to PCs and more, Microsoft has done a good job making itself virtually indispensable.
As we near 2023, all signs point to noticeably less consumer spending because of economic conditions. This will have a chain reaction and affect most businesses, but Microsoft's diverse revenue streams and countless corporate clients can help insulate it. It's not recession proof, but it'll be one of the last to feel the ripple effect if it happens.
Because of how much money it makes from software, Microsoft also has higher gross profit margins than other Big Tech companies. This gives it the ability to squeeze out profits from fewer total sales. At the end of the third quarter this year, its gross profit margin was 68%, compared to Apple and Alphabet, which had gross margins of 43% and 56%, respectively.
3. Alphabet
Alphabet has had the worst 2022 of the three companies, down 35% year to date. While many stocks have been plummeting this year despite no real business reason, Alphabet's has taken a bigger hit, mainly due to a slowdown of ad revenue.
However, that was to be expected. Given interest rates and inflation levels, businesses were bound to cut expenses, and advertising is usually one of the starting points.
Digital advertising -- where Alphabet makes the bulk of its money -- is cyclical. When the economy is doing well, digital ads do well, and vice versa. Google's parent company will likely feel the effects of a 2023 recession more than others on this list, but the long-term outlook makes it a worthy investment.
A different type of advertising will drive Alphabet's future growth: e-commerce. The company is trying to gain more ground through e-commerce-related internet searches. It wants to be the first place people start their shopping journey, regardless of who they eventually buy from. Google's search engine user base (billions of people) is unmatched, and with enough focus on grabbing some of the e-commerce pie by sticking to its strengths, the future could look very bright on the other side of this rough economic period.
These tech stocks might be too cheap to turn down
A metric like the price-to-earnings (P/E) ratio can give more context about a stock's price. The P/E ratio tells you how much you're paying for every dollar of a company's earnings. The higher the P/E ratio, the more expensive a stock is relative to its earnings. However, whether a P/E ratio is considered "high" largely depends on the industry.
Tech is an industry with historically high P/E ratios, but these stocks are as cheap as they've been in quite some time due to price drops with the recent sell-offs. Here's how much their P/E ratios have dropped from their highs in the past decade.
DATA BY YCharts
Even if you're not a value investor, you can rarely go wrong with investing in great companies that are trading for relatively cheap.
