Among investors, tech stocks have gained a reputation as a source for growth. While that reputation is well earned, the tech industry's successes have also led to it producing many of the safest stocks to invest in.
It's that safety designation that helped a select group of tech stocks develop a following among conservative investors. These investors are drawn to these stocks because they deliver the safety they seek while benefiting from some of the growth that has attracted more risk-tolerant shareholders. Here are three examples.
1. Apple
You can't discuss safe tech stocks without including Apple (AAPL 1.27%). Backed by the iPhone and other popular products in the iOS ecosystem, Apple grew into the world's largest tech stock. So solid is its value proposition that 41% of Berkshire Hathaway's outside investment portfolio is tied up in this one stock.
Apple holds a $165 billion liquidity position. This affords it tremendous optionality, where it can not only weather brutal economic storms but also buy or create new, varied revenue streams that can bolster its ecosystem and balance sheet. That liquidity should support Apple through its current slump. In its first quarter of 2023 (ended Dec. 31), revenue fell 5% year over year to $117 billion after having increased 8% in fiscal 2022. Currency exchange headwinds, macroeconomic challenges, and supply shortages led to the decline.
Despite that setback, Apple generated over $30 billion in free cash flow in the most recent quarter. And even with the modest struggles in the stock, it still sells at about 25 times earnings. With its ability to generate cash, investors will likely continue to pay that earnings multiple despite its current challenges.
2. Alphabet
Like Apple, Google parent Alphabet (GOOGL 0.55%) (GOOG 0.74%) is showing its strength amid recent troubles. Although it owns Google Cloud and is working to diversify its revenue base, the majority of its revenue comes from advertising on its search engine, YouTube, and other platforms.
The advertising success led to tech developments and acquisitions that will transform the company over time. It also brought Alphabet $114 billion in liquidity, which fell from $140 billion at the end of 2021.
Still, that spending is likely a sign of investments made rather than any serious trouble with the company. In 2022, it generated $283 billion in revenue, a 10% increase from last year. That occurred as Q4 growth slowed to 1% amid declining ad revenue. It also did not stop its 2022 net income from falling 21% to $60 billion. Increases in operating expenses and a rise in unrealized investment losses led to the decline.
Such results probably contributed to Alphabet's stock decline during the 2022 bear market and the P/E ratio dropping to 20. Still, Alphabet generated $43 billion in free cash flow for the year. And given its asset base and a likely recovery in the ad market, the stock's sell-off is probably temporary.
3. Microsoft
One of Alphabet's primary competitors in the cloud, Microsoft (MSFT 0.37%), also offers its investors a high degree of safety. For most of its history, investors knew Microsoft for its domination of the PC operating systems -- before the Apple iPhone reduced the need for PCs.
However, Satya Nadella became CEO in 2014 and successfully turned Microsoft into one of the primary infrastructure cloud companies. Today, it lags behind only the cloud industry pioneer Amazon in market share.
Image source: Statista.
Microsoft's safety is backed by about $100 billion in liquidity, which allows it to compete in the cloud market and bolster its businesses with operating systems, productivity software, and gaming. It has also invested in moves into the metaverse, and a relationship with ChatGPT developer OpenAI may help it compete with Google on the search front.
Such results may have contributed to a modest slide in the stock over the last year. Still, its P/E ratio of 28 indicates that investors remain confident in the stock. And since it generated $22 billion in free cash flow over the last two quarters, investors likely have a good reason for believing in the cloud stock's strength and safety.
