The U.S. stock market has been exceptionally volatile since 2020, mainly due to the lasting impact of the COVID-19 pandemic, increasing economic uncertainties, and geopolitical tensions. However, despite the tumultuous economic environment, many technology stocks have posted eye-popping returns.
Increasing adoption of remote work, online shopping, cloud computing, and artificial intelligence (AI) technologies has played a major role in driving technology stocks. With investors keen on capitalizing on the digital transformation trend, here are my three top technology picks that are well suited to deliver solid long-term returns in the coming years.
Microsoft
Shares of technology giant Microsoft (MSFT -1.00%) have surged by roughly 50% in the past year. In late January, the company posted impressive second-quarter fiscal 2024 results, with revenue and earnings surpassing analyst estimates.
Not surprisingly, the company's investments in ChatGPT developer OpenAI continue to be the talk of the town. Microsoft has successfully integrated OpenAI's technologies across its suite of products, rapidly acquiring new customers and significant productivity gains.
Azure, Microsoft's cloud computing platform, has emerged as a major beneficiary of the company's AI strategy. Azure closed the quarter ending Dec. 31, 2023, with an estimated 24% share of the market, up 2 percentage points from a year earlier. Customers have been opting for Azure to simplify and speed up their cloud migrations. Microsoft says furthermore that Azure's OpenAI service is being increasingly used by several AI-first start-ups as well as over half of the Fortune 500 companies. Microsoft had 53,000 Azure AI customers at the end of the second quarter, of which over one-third were new to the Azure platform.
Going beyond Azure, Microsoft's AI-powered assistant, CoPilot, is increasing efficiency and productivity for user of its Microsoft 365 cloud-native productivity platform and GitHub software development platform. CoPilot played a major role in driving Github revenue up over 40% year over year in the second quarter.
While the adoption of AI technologies has fast-tracked Microsoft's growth strategy, the company's broad geographic presence and diversified product portfolio are also additional reasons to like the stock. The company also boasts a solid balance sheet, with $81 billion in cash and $58.7 billion in free cash flow.
Looking at the long-term potential of Microsoft's AI-powered businesses and solid financial position, the stock seems like a smart buy now.
Amazon
Another stock looking quite exceptional now is e-commerce and cloud computing giant Amazon (AMZN 0.75%), which also managed to deliver solid revenue and earnings beats in the fourth quarter of 2023. Amazon saw a whopping 383% year-over-year jump in operating income to $13.2 billion. This also played a major role in driving trailing-12-month free cash flow to $35.5 billion at the end of the year, up $48.3 billion on a year-over-year basis.
Despite increasing competition from Azure, Amazon Web Services (AWS) continues to dominate the cloud infrastructure space with a 31% market share. AWS has been growing at a double-digit rate and is on the way to an annualized revenue run rate of $100 billion. AWS' robust security and access control capabilities have proved to be a key differentiator in attracting customers for long-term projects.
Amazon is also rapidly infusing new features and generative AI technologies in AWS, which uses Nvidia chips as well as its own custom-designed AI chips to provide computation power for AI workloads. Amazon has launched the Bedrock fully managed service to enable clients to access a large number of its foundational models as well as those from other AI players to build proprietary AI applications. AWS also offers a coding companion, Amazon Q, to assist developers and provide valuable insights from multiple data sources.
Amazon is ready to rake in profits from its world-leading e-commerce business. The company's focus on delivery speeds is translating into higher purchase frequency by Prime members. An increasing percentage of third-party sellers is also helping strengthen the company's e-commerce business. Finally, Amazon is monetizing its online platform beyond product sales by offering targeted and relevant advertising to sellers and customers.
As the leader in multiple high-growth markets, there seems to be plenty of growth yet to come for Amazon.
Confluent
Confluent's (CFLT -2.99%) platform enables storage as well as processing and analysis of large amounts of streaming data, empowering clients to derive actionable insights for informed decision-making. Forrester recognized Confluent as a leader among streaming data platforms in the fourth quarter of 2023.
The Confluent Cloud cloud-based platform has emerged as a major growth catalyst and is being increasingly adopted by digital-native customers, even in a difficult macroeconomic environment. Confluent Cloud saw its revenue reach $100 million for the first time in the fourth quarter, up 46% on a year-over-year basis.
Confluent's recent financial performance underlines the resilience of its business model. After seeing its shares crash due to weak guidance given in the third quarter, the company made a solid comeback with stellar results in the fourth quarter of fiscal 2023. Revenue and earnings surpassed consensus estimates. Furthermore, the company also achieved its first positive non-GAAP (adjusted) operating margin of 5.3% in the fourth quarter, up 27 percentage points on a year-over-year basis.
While free cash flow was negative in 2023, Confluent expects it to break even in 2024. Plus, the company is currently focusing on a target addressable market of over $60 billion. With an annual revenue run rate of just $777 million, there is still much runway left for the company.
