This article was originally published on Sept. 26, 2015, and was updated by Keith Noonan on Feb. 17, 2016.
Tech sector stocks have tumbled early in 2016, but with a range of intriguing devices, services, and platforms on the horizon, as well as a growing global middle class to make use of them, there are plenty of technology-related companies to be excited about.
To get an idea of which ones could be in position for big wins going forward, we asked five Motley Fool contributors to spotlight a tech stock that has earned their love. Read on to learn why American Tower (NYSE:AMT), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Baidu (NASDAQ:BIDU), and Take-Two Interactive (NASDAQ:TTWO) made the list.
Anders Bylund (American Tower): So, I'm asked to pick my favorite stock among all the weird and wonderful tech businesses on the market today. And instead of some hot-shot smartphone maker, 3D printing innovator, or next-generation software developer, I'm going with a boring-as-nails radio tower manager. American Tower doesn't even qualify as a tech stock, strictly speaking, being organized as a real estate investment trust that just happens to focus on wireless towers.
Yeah, you heard me. That's my pick.
You see, American Tower may sound dull and uninteresting. But the real story is actually anything but mundane.
As long as mobile networks matter, their operators will need base stations and radio towers to keep the signals flowing. All of the major wireless networks are big American Tower customers, and they'll remain so for decades to come.
Yes, decades. Clients sign long-term leases for their tower space; the average length of the contracts American Tower signed in the second quarter was 29 years. That's long-term stability on a silver platter.
Moreover, the company is chasing growth via new construction and strategic buyouts, both in America and abroad. And the international story is a huge piece of American Tower's appeal.
Roughly 59% of the company's tower sites are found abroad today, up from 41% in the year-ago quarter as CEO Jim Taiclet focuses on two waves of developing markets. First, nations like Brazil and Mexico are running about five years behind the development of the American market and are rolling out 4G networks on a large scale right now. About one quarter of American Tower's sites can be found in these markets today, poised to deliver strong lease revenue growth over the next few years.
Then, places like India and Nigeria are trailing the U.S. wireless market by about a decade and are just getting into 3G networks as we speak. That's another 25% of American Tower's global antenna system today, creating a multilayered strategy for many years of fantastic international growth.
So yeah, I'm actually excited about a seemingly humble radio tower operator. Growth, stability, and a stock trading at just 15 times forward earnings!
Tim Brugger (Microsoft): In part because of its lackluster stock performance year to date, Microsoft should make your short list of stocks to love. Naysayers point to the impact the slowing PC market has had on Microsoft, and they're right. However, eventually, investors will come to recognize that Microsoft's reliance on desktop computing is a thing of the past, and it remains woefully undervalued.
The company's fiscal 2016 Q2 report showed a more than 70% annual increase in trailing-12-month cloud revenue, and Microsoft managed to roughly doubled its cloud customers base over the period. Quarterly revenues from the Azure cloud platform were up 140% on an annual basis, and Microsoft continues to cement its leadership position in the cloud.
As for CEO Satya Nadella's "mobile-first" pillar, even that's showing signs of life. Microsoft's second-quarter revenues from Surface tablets were up 29% $1.35 billion, with sales driven by the release of the Surface 4 and Surface Book, and a continued presence in mobile hardware creates the opportunity to hook new users into the company's services.
Microsoft's dividend is icing on the cake. At 2.8%, Microsoft's new dividend yield is significantly above the average yields for the S&P 500 and 10-year Treasury bonds. As Microsoft continues to distance itself from its competitors in the fast-growing cloud market and solidifies its mobile results, investors will finally come to realize this it isn't your father's Microsoft any longer -- and that's when the fun will begin.
Andres Cardenal (Alphabet): Alphabet is a unique name in the tech industry. The company is the undisputed leader in search, according to estimates from eMarketer, retaining a gargantuan 55% of all advertising dollars produced by the online search industry.
In addition, Alphabet is building an extraordinarily valuable portfolio of services and applications, and YouTube looks like a particularly exciting growth driver for the company over the years ahead. Mobile YouTube videos reach more people in the 18-49 age group than any cable network in America, and living room watch time on the platform more than doubled across 2015.
As global consumers are increasingly going online for their video content, advertisers are jumping in to capitalize on the opportunity. Alphabet reports that the number of small and medium businesses advertising on the platform has doubled over the last two years, and the company is working with new technologies including virtual reality to keep its video platform ahead of the curve.
Total company-level sales grew by an impressive 24% on a constant-currency basis last quarter, and the business model is remarkably profitable, as Google generates an adjusted operating margin around of 34% of revenue. Sustained sales growth, in combination with rock-solid profitability, bodes well for investors in Google stock over the years ahead.
Dan Caplinger (Baidu): The Chinese stock market has gotten hit hard lately, with many investors worried about bubble-like conditions amid a huge uptick in investing participation among ordinary Chinese citizens. Yet as so often happens, the recent sell-off hasn't discriminated between good companies and bad, and Baidu has found its stock crushed despite having impressive growth opportunities.
Baidu investors have had some legitimate concerns recently, as margin levels have been decreasing steadily, and most of those following the stock expect a drop in profits in the near future. Nevertheless, Baidu's revenue growth continues to climb unchecked, and in the long run, the Chinese search giant appears to be on the right path toward transitioning away from its desktop dominance to play a bigger role in the rapidly growing mobile search market.
Even though Baidu's efforts to create partnerships with locally based businesses are costing the company in the short run, the impact the strategy could have over time could offset those short-run costs, especially if it allows Baidu to remain involved in transactions through mobile apps and other vehicles beyond traditional, Internet-based ordering. China might be slowing, but it's not down for the count, and Baidu can expect to participate in the nation's success for years into the future.
Keith Noonan (Take-Two Interactive): Take-Two has been delivering great results, with its last quarterly report touting 45% annual growth in sales of online games, content add-ons, and digital currency. Growth in high-margin digital content sales and an expanding audience for its games give the publisher paths to significant earnings growth.
Take-Two's core property, Grand Theft Auto, is stronger than ever, and the company's overall lineup looks to be improving as well.
Grand Theft Auto 5, released in 2013, has shipped a staggering 60 million copies, and is still moving units -- coming in as the fifth-best-selling game in U.S. retail in 2015. Take-Two also publishes hit titles in the WWE, Borderlands, and NBA 2K series, although its best earnings periods remain tied to the releases of new, mainline Grand Theft Auto games -- making valuation metrics such as price-to-earnings and price-to-earnings-growth ratios relatively difficult to use as indicators of stock-price fairness. Alternatively, the roughly $2.9 billion market cap company has about $1.2 billion in cash and short-term assets, under $500 million in long-term debt, and an enterprise value of roughly $2.2 billion -- or just about 7 times the company's trailing-12-month free cash flow in a period that did not see the release of a new, mainline Grand Theft Auto game.
Take a potential value play and combine it with one of the biggest franchises in entertainment, a strengthening software lineup, and an increasingly favorable sales makeup, and there's a lot to love about Take-Two.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund owns shares of Alphabet (A shares) and American Tower. Andrés Cardenal owns shares of Alphabet (A shares) and Alphabet (C shares). Dan Caplinger owns shares of Alphabet (C shares). Keith Noonan owns shares of Take-Two Interactive. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), American Tower, and Baidu. The Motley Fool has the following options: long January 2017 $80 calls on American Tower. The Motley Fool recommends Take-Two Interactive.
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