2015 was a big year for the tech industry, and 2016 could be even bigger. With a range of new devices, software innovations, and trends such as the Internet of Things coming together, 2016 has the potential to be a pivotal year for technology.
To get an idea of which tech stocks are looking strong for the new year, we asked five Motley Fool contributors to spotlight a company that could thrive in 2016 and beyond. Read on to learn why Infinera (NASDAQ:INFN), Baidu (NASDAQ:BIDU), Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) made the list.
Tim Beyers: For much of the past decade, the essential elements of computing -- from creating code to running it -- have moved to the web. Thousands of companies have benefited from the shift, even as the structure and delivery mechanisms of the Internet itself haven't much changed. Those days are (almost) over, which is why I'm recommending Infinera.
Two trends favor this business. First, our appetite for data is growing by virtue of access. Put a tablet or smartphone in our hands, and we'll head online. The more we do that, the more stress we put on the networks made to deliver data. The older the network, the greater the stress. Think of it as a one-lane highway trying to serve as the main artery for a major metropolitan center -- it's not impossible, it's just slow and terribly inefficient. That's what we have with the web today; Akamai Technologies says it's taking longer to load the rich data available on modern websites.
Second, there's a plethora of unused or "dark" fiber cabling stretching across much of the U.S. and other areas of the industrialized world. Consumption trends all but guarantee we'll put more of this fiber to use in the coming years, which in turn creates demand for Infinera's optical networking equipment -- think of them as the loaders, pavers, and steamrollers made to add lanes on the information superhighway.
We're already seeing gains. Infinera reported a 34% jump in revenue in the third quarter and a 46% increase in cash from operations, fueled in part by its recent acquisition of Transmode. Mix in a likely acquisition bid from one or more of the major network equipment suppliers, and Infinera looks to me like one of 2016's most attractive tech investing opportunities.
Andrew Tonner: If readers of this article have a time horizon of 2016 and beyond, then Chinese search engine Baidu deserves your consideration.
The path to realizing the company's potential could prove messy though, as contagion from the recent turmoil in Chinese financial markets threatens to depress shares of healthy businesses like Baidu. Depending on how bad the situation grows, Baidu stock could certainly endure further losses in the coming weeks and months. As such, investors considering Baidu need to be prepared for the possibility of sustained short-term volatility. However, like its global search counterpart Alphabet's Google, the financial crisis of 2008 didn't invalidate Google's long-term business prospects. Rather, it created a buying opportunity. The same should hold true for Baidu today.
Like Alphabet's Google globally, Baidu controls the overwhelming majority of the lucrative search engine market in China. However, with Baidu's core advertising customers sitting at 15% of its total potential market, its core business alone enjoys enough growth potential to warrant investing.
Baidu has also moved headlong into an emerging series of additional technology growth markets in China, including online food delivery and online travel, to name a few that offer compelling economic opportunities in their own rights, but also compliment Baidu's core search offering nicely. Trading at 35 times, Baidu might appear expensive at first. However, for investors looking to hold their investments well beyond 2016, Baidu remains one of my favorite long-term picks in tech.
Tim Brugger: When CEO Satya Nadella introduced his "mobile-first, cloud-first" mantra, the groans from investors and industry pundits alike were audible. Microsoft wasn't making a dent in the smartphone wars with its Lumia line-up, which led to an $8 billion plus write-off of its $7.2 billion deal for Nokia's phone unit.
The thing is, investors are slowly beginning to recognize that "mobile-first" was never just about smartphone sales. An omen of things to come was Microsoft's decision to finally make an iOS- and Android-friendly version of its flagship Office 365 app. Mobile-first is about getting Microsoft products into as many devices as possible, regardless of OS or manufacturer, and it's working like a charm.
Already, Windows 10 has been downloaded to over 200 million devices, easily making it Microsoft's fastest-growing OS ever. The result of Nadella's mobile efforts was, in part, reflected in last quarter's nearly 70% jump in Office 365 commercial revenue, search ad sales increasing just shy of 30%, and more than tripling the number of Dynamics CRM users. And Microsoft's improving mobile ambitions aren't even the best news for investors.
By most accounts, cloud-related revenue is expected to climb to well over $100 billion annually within the next couple of years, and that may be overly conservative. The second piece of Nadella's two-pronged pie, "cloud-first," is where Microsoft really shines. With an over $8.2 billion annual run-rate, Microsoft has quickly cemented its place at the head of the cloud provider's class, with no signs of slowing anytime soon.
Now, toss in a nearly 3% dividend yield and a forward price/earnings ratio of just 17, and Microsoft warrants a prominent spot on a list of top tech stocks to buy in 2016.
Tamara Walsh: Heading into the new year, Apple offers investors the best of both worlds: It is still a strong growth story, but also a rewarding dividend stock. For income investors, the tech titan pays an annual dividend of $2.08, which, at today's share price of around $103, means the stock has a dividend yield of 1.97%. That may not seem like a lot, but it is in line with the S&P 500 and industry average.
Moreover, Apple's ability to generate loads of cash means it won't have a problem growing its dividend payouts for many years to come. There's also the company's uber-rewarding dividend and stock buyback programs valued at around $140 billion today.
It is an opportunistic time to buy shares of Apple, as the stock is more attractively priced than other big tech names today. Apple is trading just 11% above its 52-week low on concerns that iPhone sales will be weak in the upcoming quarter. This creates an opportunity for investors to buy one of the most recognizable tech stocks in the world at a discount. Shares of Apple look cheap, with a price-to-earnings growth ratio of 0.82, which is significantly below the industry average PEG of 2.26. The stock also trades at just 11 times earnings, compared to a price-to-earnings ratio north of 20 for the broader industry.
With a strong product pipeline heading into 2016 and a rewarding dividend program, Apple stands out as a top tech stock to own in the new year.
Keith Noonan: Alphabet's leading positions in online advertising and network platforms make it one of the strongest tech companies in the world. Due to the entrenched nature of its search business, the tech giant's stock appears to offer comparatively little risk in relation to the broader technology sector, but it also has significant growth potential thanks to investments in "moonshot" technologies, as well as more probable technological revolutions such as robotics and the Internet of Things (IoT).
Alphabet currently has a forward P/E ratio of roughly 26, which looks reasonable given the company's wealth of opportunities.
On the IoT front, 2016 looks to be a big year for the company. Alphabet's Nest subsidiary is already one of the early leaders in the developing smart home space, and the company is making a big marketing push to increase exposure to these new technologies and better establish the brand. If smart homes and the Internet of Things take off the way many are predicting, Alphabet's business will see benefits across multiple segments. There's an obvious opportunity in selling IoT-oriented hardware and services, but the real prize is in data collection and analytics breakthroughs.
With its core business in great shape and a wide range of exciting new projects and opportunities, Alphabet looks to be a top tech stock in 2016 and beyond.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner owns shares of Apple and Baidu. Keith Noonan has no position in any stocks mentioned. Tamara Rutter owns shares of Apple, Baidu, and Microsoft. Tim Beyers owns shares of Alphabet (A and C shares), and Apple. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Apple, Baidu, and Infinera. Try any of our Foolish newsletter services free for 30 days.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
