As December’s holiday season approaches, investors looking to buy technology stocks ahead of 2020 will have to tread carefully. The stock market is trading at all-time highs, and well-known, widely followed tech stocks are no exception.
But just because a stock is at new highs, investors should not blindly exclude it. So long as the company can continue to grow for the next few years, the stock is worth considering. Investors just need to be careful about picking the right names, with clear tailwinds.
What are the seven tech stock stocking stuffers to consider holding now? And wasn’t that a mouthful?
Tech Stocks to Buy: Microsoft (MSFT)
Microsoft (NASDAQ:MSFT) joined the trillion-dollar valuation club and is in good company with Apple (NASDAQ:AAPL). In the last few years, under the leadership of Satya Nadella, the software giant pivoted its business towards consistently strong quarterly growth. It shed losing businesses like smartphone hardware and doubled down on cloud software in the consumer and enterprise space.
In its first quarter, Microsoft reported revenue growth of 14% to $33.1 billion. Its productivity and business processes segment accounted for around one-third of that revenue, growing 13% year-over-year. The intelligent cloud division grew 27% year-over-year. Its on-premises server business drove that growth. And continued demand for its hybrid value resulted in server products and cloud services revenue increasing 30%.
The 59% growth in Azure is commendable. It beat out the incumbent, Amazon(NASDAQ:AMZN), in a deal worth $10 billion. Amazon filed a challenge by expressing concern that politics was entangled during the fair contracting process. Despite the complaint, Microsoft has a favorable and growing mix of Azure, infrastructure-as-a-service and platform-as-a-service revenue. This should give the unit continued profit growth in 2020.
In the last quarter, Office 365 commercial monthly active users surpassed 200 million. Revenue grew 25% year-over-year, driven by the installed base growth across all workloads and consumer segments. Average revenue per user also rose in the quarter. So, if the online productivity software is the best for workers, buying a subscription as a stocking stuffer makes sense.
Analysts have a $160 average price target on MSFT stock. Similarly, a 5-year discounted cash flow EBITDA exit model that assumes a 10.9% compounded annual growth rate suggests the stock is also worth roughly $159.
After bouncing back from the sub-$45 lows a few times in 2019, Intel (NASDAQ:INTC) is poised to hold its stock price levels next year. The stock pays a dividend that yields around 2.2%. And while Advanced Micro Devices(NASDAQ:AMD) fans will point to Intel’s technological lag as a reason to buy an AMD CPU instead, Intel still enjoys strong CPU demand.
On Nov. 20, Intel apologized for CPU product delays. Executive Vice President Michelle Johnson Holthaus said: “I’d like to acknowledge and sincerely apologize for the impact recent PC CPU shipment delays are having on your business and to thank you for your continued partnership. I also want to update you on our actions and investments to improve supply-demand balance and support you with performance-leading Intel products. Despite our best efforts, we have not yet resolved this challenge.”
The letter suggests that demand for PC CPUs is healthy and that Intel now needs to get its 14-nanometer wafer capacity online. But even after it increased its second-half PC CPU supply by double digits, demand is still outstripping supply. This lead to shipment delays that may spill into the new year and beyond.
In the 5G market, Intel is leading the network developments for agility, scalability and intelligence. As billions of connected devices are added, 5G network demand will keep growing. In 2018, Intel posted $9.5 billion in revenue from network and edge computing. 5G will accelerate its performance. Autonomous driving will add $10 billion, the internet of things will add $30 billion and network silicon will add $25 billion in opportunity by 2023.
At the most optimistic level, a price-to-earnings multiple model compares Intel’s valuation to peers. It suggests that the stock is worth $68 a share.
Electronic Arts (EA)
Electronic Arts (NASDAQ:EA) briefly lost its way back in the summer when investors started doubting the prospects of Apex Legends Season 2. Weak monthly video game sales data also pulled EA stock lower. Still, predicting when gaming demand returns is impossible. Instead, investors need to believe that the EA team knows how to develop hit game titles that customers want.
Apex Legends Season 4 will soon follow. It will allow EA to offer a new map, a new legend and improve the game. EA has a few other hit titles on the market. Star Wars Jedi: Fallen Order is rated 9/10 on Steam and retails for approximately $70. Needless to say, the game is good stocking-stuffer title this holiday season.
Strong sales of the Jedi title will offset potentially falling year-over-year sales. This is due to NBA Live not getting shipped this year. Acknowledging that a PlayStation 4 and Xbox console refresh were on the way, EA decided to delay the game release. In the current quarter, the company has Plants vs. Zombies: Battle for Neighborville and Need for Speed Heat launching. If these titles perform well, this will more than offset the gap in sales from the NBA franchise.
Beyond 2020, EA may even want to abandon the NBA title and let Take-Two Interactive (NASDAQ:TTWO) take that market. Instead, EA could focus on NCAA football. The company already has success in the soccer game market. Conversely, the market is big enough for EA to release a college football game.
20 analysts who cover EA stock have a $110.80 price target. If EA’s 5-year CAGR revenue grows by over 7%, the stock’s fair value is consistent with analyst targets.
At some point in time, Facebook(NASDAQ:FB) thought of marketing its Instagram and WhatsApp products with the Facebook brand name. That has not happened yet. Investors are better off if Facebook never does this. Those two apps are growing at a healthy pace on their own. Advertising revenue is strong enough overall that investors should hold FB stock through the holidays and beyond.
Facebook is up by over 50% year-to-date as worries over its privacy breach waned. Quarterly revenues continue to impress investors as advertisers spend more of their budget on the social networking site. In Q3, daily active users grew steadily to 1.6 billion. The Asia-Pacific market, followed by the rest of the world, is the most active market. Advertising revenue was $17.4 billion. And even though the company said it would raise spending on security initiatives, expenses as a percentage of revenue barely inched higher year-over-year.
Now that operating margin is rebounding strongly, expect the company’s profitability to return to levels not seen since 2017. With users unable to disconnect from Facebook, Instagram or WhatsApp, advertisers must keep their spending levels up. This will enrich Facebook’s balance sheet and give it more resources to pursue growth. It may increase its spending on improving the advertising engine on Instagram. Or it may figure out a way to monetize WhatsApp. If it does so, then FB stock, at a 22 times forward price-to-earnings ratio, will look like a bargain.
Analysts have a $234.70 price target on Facebook stock. Conversely, if Facebook sustains its historical revenue growth rate, then investors may assume a 28% revenue 5-year CAGR. In that scenario, the fair value of Facebook stock is almost $270.
Wearable devices became mainstream and continue to be in high demand. Fitness tracking devices could be a hot holiday gift-giving idea again. Even if that does not happen, Garmin(NASDAQ:GRMN) will likely continue reporting record sales.
In the third quarter, Garmin, which makes products for the aviation, fitness, outdoor and marine markets, reported revenue growing 15%. At $934 million in quarterly revenue and gross margins of 60.7%, the company dominates by selling good products its customers need. In 2020 and beyond, business jet and helicopter certifications will continue to represent market share gains for Garmin. Last quarter, Garmin unveiled the Autoland system for general aviation. By designing a good that helps planes safely land in an event of an emergency, it supplies the world with potentially life-saving technology.
In the fitness segment, Garmin’s popular wearables lifted revenue growth to 28%. So, not only are Garmin’s consumer products great for gifts during the holiday, the stock is still inexpensive. Even at 52-week highs, the stock trades at a trailing P/E of 24 times.
Revenue declines of 17% in the auto market are a headwind for Garmin. Ongoing personal navigation device (PND) market contractions hurt results but Garmin’s global PND market share is still strong. It started shipping Overlander, an all-terrain GPS navigator in Q3.
Garmin raised its 2019 earnings per share and revenue guidance. It increased its revenue growth estimates for the aviation and fitness unit, each by 3% more. Still, the cautious value investor could assume a downside 5-year CAGR revenue of just 8%. That would imply GRMN stock has a fair value that is below $90 a share. But if history repeats itself, revenue growth will be in the low double-digit range.
Western Digital (WDC)
Western Digital (NASDAQ:WDC) fell out of favor in the last month when the company reported fiscal first-quarter results. At a lower stock price, the dividend yield is a favorable 4%. But first, the company needs to get past disappointing investors with a lower Q2 outlook.
WDC forecast revenue of between $4.1 billion and $4.3 billion. EPS between 45 cents and 65 cents are below the consensus estimate of 75 cents. Even though the current quarter is light, FY 2020 is off to a good start. Its capacity enterprise drives are successful. And WDC is gaining momentum in non-volatile memory express-based enterprise solid-state drives. So, if the sector is moving past a cyclical trough, revenue should grow throughout 2020.
Western Digital is set to benefit from a higher demand for storage. This is driven by data center, mobile, PC and retail end markets. But the decline in gross margin for flash and hard drives ended. In the last three quarters, margins stabilized while revenue for these two markets is increasing. Thanks to significant shipments of WDC’s 14-terabyte capacity enterprise drives, revenue will probably exceed $1.5 billion a quarter.
WDC also has a strong balance sheet. It generated $3.2 billion in cash flow in the last quarter. It had liquidity of $5.5 billion (includes a $2.3 billion undrawn revolver). And with no major debt due until 2023, it has plenty of time to grow revenues.
Nutanix (NASDAQ:NTNX) bottomed at $17.74 in August and appears set to trade between $45 and $55 in 2020. Strong quarterly results squeezed the bears, who had a 7.5% short float position.
Nutanix reported an adjusted gross margin of 80.1%. Profitability is very healthy because the company is shifting towards a subscription-based revenue model. And as subscriptions becoming a bigger portion of its revenue, profitability will rise further.
In its first quarter, Nutanix reported billings growing by 41% to $276 million and revenue increasing 72% to $218 million. The transition to subscriptions is progressing at a healthy pace. Nutanix sees its quarterly subscription billings mix topping over 75% by the fiscal fourth quarter. So, investors should do well by holding the stock now and beyond late 2020.
In Q2, Nutanix forecast support billings as high as $420 million and software and support revenue of up to $335 million. Net loss will be around 70 cents a share. For FY 2020, software and support billings could be close to $2 billion. These figures suggest that Nutanix will lower operating expenses and investments. Though it had a healthy cash position of $889.4 million, this is down 7.8% from last year. Still, Nutanix is well-positioned to start reporting consistent quarterly profits in 2020.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.