Over the past few years, many tech stocks skyrocketed as the secular expansion of the cloud and AI markets generated persistent tailwinds for the sector. But as the Nasdaq hovers near its record highs, many investors might be reluctant to add more shares of tech stocks to their portfolios.
However, if you can tune out the near-term noise and are planning to hold your stocks for at least a few years, then this could still be a good time to invest in tech companies with wide moats and robust growth rates. I personally think Arm Holdings (ARM 0.31%), The Trade Desk (TTD 1.33%), and Arista Networks (ANET 0.72%) make the cut.
Arm Holdings
Arm Holdings provides designs for the mobile chips used in approximately 99% of the world's premium smartphones. It mainly licenses its designs to other chipmakers like Qualcomm and MediaTek, but it also plans to start producing its own chips.
Arm conquered the mobile market with its chip designs because they were more efficient than the x86 chips produced by Intel and Advanced Micro Devices. Moreover, by licensing its designs to a wide range of chipmakers, it profits while its partners shoulder all of the manufacturing, marketing, and distribution costs. Its plan to produce first-party chips marks a departure from that long-term strategy, but it could easily undercut other Arm-based chipmakers because it won't need to pay itself any licensing fees.
Most of Arm's recent growth was driven by the rising popularity of its AI-optimized Armv9 designs across the mobile, cloud, and automotive markets. Those designs generate much higher-margin royalties and licensing fees than its older chip designs.
From its fiscal 2025 (which ended in March) to fiscal 2028, analysts expect Arm's revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow at compound annual rates of 20% and 24%, respectively. The stock isn't cheap at 48 times next year's expected adjusted EBITDA, but it still looks like a great long-term play on the expanding AI market.
The Trade Desk
The Trade Desk owns the world's largest independent demand-side platform for digital ads. DSPs sell advertising space for programmatic ads across desktop, mobile, and connected TV platforms to advertisers, and they work in tandem with sell-side platforms that help publishers sell their own ad inventories.
Big tech companies like Alphabet and Meta Platforms bundle demand-side and sell-side platforms, but they also lock advertisers and publishers inside their ecosystems. To break free from those walled gardens and reach the open internet, advertisers turn to independent demand-side platforms like The Trade Desk.
The rapid expansion of the connected TV market (through ad-supported streaming videos) is generating persistent tailwinds for its business. It has been expanding its ecosystem with Solimar, an AI-powered platform that collects more first-party data; its Unified ID 2.0 (UID2) solution, which replaces traditional cookies; and a smart TV OS called Ventura for hosting its own ads. It's even bypassing some sell-side platforms with OpenPath, a platform that directly connects its advertisers to publishers.
From 2024 to 2027, analysts expect its revenue and adjusted EBITDA to grow at compound annual rates of 17% and 16%, respectively. Its stock looks cheap at 16 times next year's expected adjusted EBITDA, and it still has plenty of room to grow as more advertisers shuffle away from Google and Meta.
Arista Networks
Arista Networks is a major producer of networking hardware and software. It sells low-latency switches that are optimized for hyperscale cloud deployments, and it provides a modular operating system that is compatible with a wide range of networks.
Those qualities set Arista apart from larger rival Cisco, which provides networking and hardware to a broader range of enterprise and campus customers. Cisco also tends to lock its customers into its proprietary hardware and operating systems.
Arista primarily serves large cloud and AI customers like Meta and Microsoft, which both rely on its switches and software to run their latest applications. Its CloudVision platform also helps those customers easily monitor and analyze their data center deployments.
From 2024 to 2027, analysts expect Arista's revenue and adjusted EBITDA to grow at compound annual rates of 22% and 20%, respectively. It isn't a screaming bargain at 34 times next year's expected adjusted EBITDA, but its broader exposure to the booming AI market should justify that higher valuation.
