The tech sector has traditionally been considered a risky segment of the market. But the world is changing, and the leading companies in the industry have positioned themselves as rock-solid powerhouses with indisputable competitive strengths and immaculate financial statements.
With this in mind we asked our contributors to highlight three particularly strong opportunities in the industry. Perhaps not surprisingly, industry behemoths Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) emerged as particularly solid tech stocks for low-risk investors.
Brian Stoffel (Apple). Investors pursuing low-risk technology stocks would be hard-pressed to find a better option than Apple. There are three huge reasons the company's shareholders can rest easy at night.
First is the company's massive cash hoard. By the end of 2014, Apple had $178 billion in cash and investments. That's larger than the GDP of 132 countries, according to the International Monetary Fund . With a war chest like that, investors know the company is protected from an economic downturn, and that it has the resources to keep competition at bay.
That cash also means the company will have no problem continuing to pay and grow its dividend. Although the current yield of 1.5% might not sound sexy, investors should remember that Apple has produced $60 billion in free cash flow over the past 12 months, but has only had to use about 10% of that cash flow to pay its dividend.
Finally, the Apple brand and ecosystem give the company a sustainable competitive advantage that eluded it during early days of growth in the aughts. Interbrand once again rated Apple as the most valuable brand in the world last year. Meanwhile, with all of Apple's products working hand-in-hand, significant switching costs are developing.
Trading at just 17 times earnings and 12 times free cash flow, Apple is a great low-risk technology investment.
Bob Ciura (Microsoft). While this company is in the technology sector, which is often prone to high volatility, Microsoft is a reliable slow-and-steady blue chip. Microsoft generated nearly $50 billion in revenue in the first two quarters of its current fiscal year. This was up 15% from the same period in the previous year.
Microsoft's pristine balance sheet also makes the company less risky than most other stocks. At the end of last quarter, Microsoft held $90 billion in cash and short-term marketable securities on its books. The company held an additional $12 billion in long-term investments. That means Microsoft had more than $100 billion in total marketable securities on the balance sheet. With only $18 billion in long-term debt, Microsoft has a rock-solid financial position. Indeed, it is one of only three U.S. companies to hold the coveted triple-A credit rating from Standard & Poor's.
Last but not least, Microsoft delivers a strong dividend with excellent growth. Microsoft offers a juicy 3% dividend yield, and has increased its payout by 18% compounded annually over the past five years.
Microsoft operates a large, highly profitable business with a fantastic balance sheet and a hefty dividend. These qualities make Microsoft a great stock for low-risk investors.
Andres Cardenal (Google). Google is arguably the most powerful and ubiquitous force on the Internet, for both desktop and mobile. People don't search for information online anymore, they "Google" it. This says much about the company's brand power and competitive strength.
Based on data from StatCounter, Google owned nearly 75% in the U.S. search market as of February. Microsoft's Bing came in a distant second with a market participation of 12.5%.
In addition to this rock-solid position in search, invaluable strategic assets such as its Android mobile operating system, along with massively popular services and applications including YouTube, Chrome, and Maps, make Google the global online king. Also, the company becomes stronger as it gets bigger over time, gaining valuable information from users and using it to provide better services and position its ads more effectively.
Online ad prices are falling, but Google is still delivering robust financial performance. Total revenue grew 19% in 2014, reaching $66 billion for the year. The business model is quite profitable, as Google generates an operating margin of roughly 25% of revenue.
All this comes for a very reasonable price: Google is trading at a forward P/E ratio of about 19 times earnings forecasts for 2015, roughly in line with the average company in the S&P 500. But Google is far superior to most companies in the index when it comes to quality and growth potential.