If the 30% spike in the Nasdaq Composite is any indication, then tech stocks have become much more expensive in 2023. We seem to be past the days when an investor could buy Apple at five times sales or own cybersecurity specialist Palo Alto Networks for seven times sales. These stocks are now valued at seven and 11 times sales, respectively.
But while most tech stocks are more expensive today, that's no reason to avoid the sector altogether. You can find attractive deals even in a market that has rallied significantly.
With that goal in mind, let's look at two great businesses in the tech sector. Read on for some reasons to like Microsoft (MSFT 1.25%) and Take-Two Interactive (TTWO 7.53%) right now.
1. Microsoft
Investors can become desensitized to the scale of Microsoft's success, but it's worth noting the massive size of its sales and profits. In the most recent quarter (ended in late June), the software giant generated $56 billion in sales, up 10% year over year. Nearly half of that haul became operating earnings, with that metric rising 18% to $24 billion. And almost all of that figure became net income, which landed at $20 billion, or a blazing 36% of sales.
Investors can expect to pay a premium for that level of success in areas like growth and profitability. But Microsoft also has an excellent position in markets that should expand for many more years, including cloud enterprise services and video games. The stock is pricey at 11 times sales right now, but has come down from recent highs above 12.
2. Take-Two Interactive
Investors weren't thrilled with Take-Two's latest earnings report, but the drop that followed that announcement could be a great opportunity to buy the stock. After all, the video game developer beat management's fiscal first-quarter sales forecast.
Earnings were lower than expected, but that was mainly due to one-time write-offs and charges. Grand Theft Auto and NBA 2K franchises were standouts in the period. "Fiscal 2024 is off to a strong start," CEO Strauss Zeinick told investors in a conference call.
The rest of this fiscal year won't be exciting. Take-Two simply affirmed its outlook that calls for roughly flat sales. Gamers aren't spending as freely as they did during the pandemic, and so the company has pushed a few major title releases into fiscal 2025.
That's where things get interesting. Take-Two is projecting a massive year for sales and operating cash flow in fiscal 2025 that would put it in league with some of the biggest players in the video game industry, such as Electronic Arts. Sure, there's a lot of time between now and 2025, and many things could divert the company from that optimistic forecast. These risks include delayed launches, lukewarm reception from gamers, and a general economic slowdown.
But patient investors can still put this stock, along with Microsoft, on their watch lists (or in their portfolios) and simply wait for the tech specialists to do what they've been doing for the past decade: deliver market-beating shareholder returns.