Many investors shunned tech stocks over the past two years as inflation, rising interest rates, and other macro headwinds rattled the markets. It's tempting to follow that trend and park your cash in some risk-free T-bills or CDs, but the best tech stocks will still likely outperform those fixed-income investments over the long term.
If you can tune out all the near-term noise, you should pick up a few tech stocks that have the potential to generate big market-beating returns over the long term. I believe these three stocks fit that description: Super Micro Computer (SMCI 0.03%), Qualcomm (QCOM 0.76%), and Duolingo (DUOL +3.82%).
Image source: Getty Images.
1. Supermicro
Super Micro Computer, more commonly known as Supermicro, is one of the world's leading producers of pre-built servers. It didn't gain much attention when it went public in 2007, but a close partnership with Nvidia turned it into one of the market's hottest artificial intelligence (AI) stocks.
Supermicro controls a much smaller slice of the server market than Hewlett Packard Enterprise and Dell, but its earlier access to Nvidia's top-tier data center GPUs enabled it to carve out a niche in dedicated AI servers. That business grew rapidly over the past two years as the rise of generative AI platforms drove data center operators to buy more AI servers.
NASDAQ: SMCI
Key Data Points
Supermicro's revenue soared 46% in fiscal 2022 and 37% in fiscal 2023 (which ended this June), while its adjusted net income more than doubled in both years. For fiscal 2024, it expects its revenue to rise 40-54%. Analysts expect its adjusted EPS to grow 46%. Those are stellar growth rates for a stock that trades at 16 times forward earnings.
Supermicro's stock has already rallied more than 860% over the past three years, but its low valuation suggests it still has plenty of room to run. It should also remain a top AI stock as long as it keeps growing its share of the AI server market.
2. Qualcomm
Qualcomm is one of the world's largest producers of mobile system on chips (SoCs) and baseband modems for mobile devices. It also produces chips for connected cars and Internet of Things (IoT) devices. It suffered a severe slowdown over the past year as the macroeconomic headwinds intensified and the 5G upgrade cycle ended.
But in its latest quarter, Qualcomm's revenue grew sequentially for the first time in three quarters. That recovery was driven by the sequential growth of its handset and automotive businesses, which offset the macro-induced decline of its IoT business. It expects that sequential recovery to continue in the current quarter.
NASDAQ: QCOM
Key Data Points
For fiscal 2024, which ends next September, analysts expect Qualcomm's revenue and adjusted EPS to grow 6% and 11%, respectively, as the smartphone market stabilizes. Those are solid growth rates for a stock that trades at 14 times forward earnings. It pays a forward dividend yield of 2.5%.
Qualcomm still faces tough competition from MediaTek and is bracing for its loss of Apple's baseband modem orders in 2026. But for now, its low valuation should limit its downside potential -- and the cyclical recovery of the smartphone market should light a fire under its stock again.
3. Duolingo
Duolingo's namesake app is the most downloaded online language learning app in the world. It initially dominated that market by gamifying the experience with gems and rewards. Today it provides online courses in over 40 languages, an English proficiency test, and newer apps for phonics, math, and music. It monetizes its free users with ads while providing an ad-free experience with additional perks for its paid users.
Duolingo experienced a major growth spurt during the pandemic as people spent more time on its app. However, its growth decelerated after the pandemic ended, and that slowdown was exacerbated by a temporary ban on its app in China.
NASDAQ: DUOL
Key Data Points
Duolingo's revenue surged 128% in 2020, 55% in 2021, and 46% in 2022. It expects its revenue to rise 42-43% in 2023. Its growth might be leveling off, but it still more than doubled its number of monthly active users (MAUs), nearly tripled its number of daily active users (DAUs), and more than tripled its subscriber base since the end of 2020.
Those numbers all indicate Duolingo is still a hypergrowth stock. It also turned profitable on a generally accepted accounting principles (GAAP) basis in its latest quarter, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are still expanding. Duolingo might not seem like a bargain right now at more than 100 times forward earnings, but it's still growing like a weed and has plenty of ways to expand into other online education markets.
