Tech stocks are off to a rocky start this year, with big sell-offs outpacing broader market declines and volatile conditions giving investors added reason to be cautious about stocks with high growth priced into their valuations.
While technology stocks appear to be in a rough patch, the sector plays host to companies that have tremendous long-term prospects. Well-positioned tech companies are playing an enormous role in shaping the future of global commerce and are likely to be among the market's biggest winners in the next decade and beyond.
To get a sense of which stocks represent the best of what the sector has to offer, we asked three Motley Fool writers to spotlight a technology stock that belongs in any portfolio. Read on to learn which tech leaders made the list.
Daniel B. Kline (Windows still matters): For a while Microsoft (NASDAQ:MSFT) seemed like it was on its way out. The company's Windows operating system had lost market share to tablets, and it appeared Office might fall victim to the various free, Web-based services taking customers.
But since Satya Nadella took over, a stunning turnaround has taken place. The company righted the Office ship by bringing it to any platform that would have it. That included launching free apps for all the popular smartphone and tablet platforms while selling the full version on a subscription basis. This strategy gave Office new life, exposing it to more people, and changing it from a one-time purchase every few years to a recurring annual subscription -- basically an annuity for the company.
The big victory for Nadella, however, has been Windows. He made the bold decision to scrap the not-so-well-liked Windows 8 and replace it with the symbolically named, familiar-feeling Windows 10. That has appeased the company's core business user base. We're not returning to the days when Windows was the only game in town, but the bleeding has stopped.
Going forward, the company has broader prospects with Windows as an operating system for Internet of Things devices. The company also has a growing cloud services business, the Xbox platform, and a potential hardware success in its Surface line.
Microsoft has gone from a lumbering dinosaur to a tech innovator that also has a base of secure revenue. Windows and Office will pay off for years to come, and Nadella's company also has an R&D pipeline that suggests it could develop future hits on top of that impressive recurring income base.
In less than 12 years, the company has built a user base of nearly 1.6 billion people, more than a billion of whom log on each day. If Facebook were a country, it would be the biggest one on earth. It's mastered every challenge it's been confronted by, transitioning seamlessly onto a mobile platform, where it now generates a majority of its revenue, and has easily dispatched or absorbed any competitive threats.
In its most recent quarter, revenue jumped 52%, driving earnings per share up 46% to $0.79. While revenue growth that strong is an outlier, Facebook's top line will continue to grow as it and its properties, including Instagram, Messenger, and What's App, become more and more relevant for day-to-day users and more attractive for advertisers.
With its intimate, individual knowledge of its user base, Facebook can make a uniquely compelling offer to advertisers, and as traditional forms of media such as TV and print shrink, the social network will become even more valuable.
Its non-GAAP operating margin was an incredible 60%, indicating the power of not just Facebook's position but also its business model. For investors, the gobs of free cash flow being generated by the business should lead to further share price appreciation and eventually a handsome capital return.
Keith Noonan (Alphabet is strong at the core and the edges): Whether it's the push to make mobile technologies ubiquitous, the Internet of Things revolution, advances in robotics, or new frontiers in data, analytics, and online advertising, the company formerly known as Google is right there at the forefront. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is a standout among tech stocks because the company has a rock-solid core business in its search and ad platforms, while also being very well positioned in many of the pending technology revolutions that could shape the future. The company's recently released fourth-quarter report saw Alphabet significantly exceed expectations and delivered a roughly 18% year-over-year revenue increase, a 22% jump in operating income, and a 53% rise in free cash flow. These results are even more impressive given the losses incurred by the company's investments outside the Google-sphere. For the last fiscal year, Alphabet saw operating losses of $3.56 billion from the Other Bets segment, which houses projects including universal translators, self-driving cars, and Wi-Fi-beaming balloons.
Investors can bank on seeing Alphabet's core business benefit from mobile and online advertising trends, and the company looks to have already established an early foothold in Internet of Things technologies with its Nest smart home ecosystem, the Google Cloud Platform, and the Brillo operating system.