Putting money to work in the technology sector today seems like a no-brainer decision, given just how important this part of the economy has become on a global stage. There are some businesses that operate in this sector that have come to dominate while offering popular products and services. And shareholders have been able to receive huge returns.
If you're ready to invest $5,000, here are two tech stocks to buy and hold for the long term.
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Massive user bases
Investors should consider splitting $5,000 evenly between Alphabet (GOOGL 0.46%) (GOOG 0.52%) and Meta Platforms (META 0.38%). I believe these two dominant internet enterprises provide fantastic exposure to the technology sector.
Both companies have gargantuan user bases. Alphabet CEO Sundar Pichai said in the second-quarter 2023 earnings press release that the business has "fifteen products that each serve half a billion people, and six that serve over two billion each." The company owns platforms like Google Search, YouTube, and Android, which billion of people use in their day-to-day lives.
Meta is no slouch either. Its family of apps, which includes Facebook, Instagram, WhatsApp, Messenger, and Threads, had 3.48 billion daily active users during Q2 (ended June 30). That figure was up 6% year over year, showcasing how incredibly popular these social media services are.
What's obvious is that Alphabet and Meta are essential for people across the world. Besides that important point, they both have created powerful network effects. As the number of users and amount of usage grow, the products and services that Alphabet and Meta offer will only become better. That positive feedback loop is hard to beat.
Strong financial positions
Another clear reason I think investors should allocate $5,000 into these two stocks comes down to the fact that they are in pristine financial shape. This substantially reduces financial risk for anyone's portfolio, particularly when compared to companies that generate net losses or operate with weak balance sheets.
In the latest quarter, Alphabet and Meta reported operating margins of 32% and 43%, respectively. Combined, they raked in $13.8 billion in free cash flow during Q2. And as of June 30, Alphabet had $95.1 billion of cash, cash equivalents, and marketable securities on the books, while Meta had $47.1 billion. Those liquidity figures are significantly higher than the companies' debt balances, allowing them to always operate from a position of strength.
Thanks to their incredible profitability and robust balance sheets, Alphabet and Meta are in favorable positions to focus on pushing more time, effort, and resources into artificial intelligence (AI). Alphabet now plans to spend $85 billion on capital expenditures this year, with Meta upping its target to $69 billion (at the midpoint). This money will be used to build out technical infrastructure related to AI, as this new technology continues to shape corporate strategy and user experiences.
Alphabet's Google Cloud offers clients various AI-powered tools to help developers work on AI apps. And within Google Search, the AI Overviews feature now has over 2 billion monthly active users.
Meta's founder and CEO, Mark Zuckerberg, has undergone a massive AI talent spending spree. He believes that one day superintelligence will become a reality.
Finding value in today's market environment
As of Aug. 14, the S&P 500 Index trades in record territory. This bullish environment can discourage investors who are looking for attractively priced opportunities. However, these two stocks provide a glimmer of hope.
At a forward price-to-earnings ratio of 20.4, Alphabet is the cheapest stock of any other "Magnificent Seven" constituent. Meta shares trade at a more expensive multiple of 28.1. Given that these two companies still have a long runway of double-digit annual earnings growth in the years ahead, investing $5,000 in total between them is a smart move.
