Tech stocks are apparently booming each year and here are the tech stocks to buy forhigher returns no matter where the market goes!
No other sector has produced the kind of returns you get from tech stocks. Stocks in the Tech Select Sector ETF, the XLK, produced returns of 35% and higher in three of the last five years. Even including the bursting of the tech bubble, shares of the QQQ Nasdaq 100 have produced a six-fold return on your money…more than twice the return on the broader market.
In fact, investing just $100 a month in tech stocks, less than the cost of that daily mocha-cocoa-frappacino over the last ten years, you would now have over $35,000 in stocks. That’s well over the $28,500 your portfolio would have grown to in the broader stock market and 51% more than you’d have if you invested in value stocks.
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But is tech doomed in 2022?
That huge outperformance has made tech undeniably expensive. This chart shows the forward price-to-earnings ratio of stocks in each sector, so the price of the stocks divided by profits analysts are forecasting over the next year. The dark blue bar is the current PE ratio and the green is the 10-year average and you see, Information Technology, the second-most expensive sector with a price of 26.8-times earnings. That puts tech stocks 54% higher than the long-term average PE ratio of 17.4-times.
And stocks in the sector have already slowed that meteoric rise. So far this year, shares are up just 23%, putting tech in the middle of the pack after leading the market for two-straight years.
Now stocks don’t selloff just because they get expensive but there are some things you need to watch in 2022. In this video, I’ll give you a complete 2022 outlook for tech stocks; the good, the bad and the downright ugly. I’ll show you which industries and trends and reveal two tech ETFs to follow. Then, I’ll reveal the seven tech stocks to buy for higher returns no matter where the market goes!
If you want to see which stocks I’m buying for the long-term, check out the link I’ll leave below to this free report, the five biggest stocks in my portfolio. It’s completely free, I’ll send it directly to your email so make sure you check that out.
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The Biggest Force in Tech Stocks
I’m going to start with that 2022 outlook for tech stocks and some of the challenges the sector is facing.
And arguably the biggest force on tech stocks and really even outside the sector next year is going to be the shortage of semiconductor chips. Think of chips as the brains of any electronic device, giving it the processing power to function. Between factory closures during the pandemic and just a massive increase in demand for semiconductors, the shortage has affected everything from car production to household gadgets this year. It’s affected nearly every sector because everything needs a chip in it these days and it’s a big part of the surging inflation picture.
Now that shortage isn’t going away anytime soon and could easily last through 2022 so you need to be careful of industries that will be most affected like carmakers and consumer electronics. But I think a lot of investors are missing the main idea here and that’s the amazing increase in demand for those chips. From the Internet of Things to the 5G upgrade cycle and AI…all of this is going to drive demand for semiconductors for decades. The bottlenecks in production and higher capital spending to increase production is weighing on the chip makers now so you’re seeing earnings weakness but you don’t want to neglect chip stocks for next year or the future.
Higher wages is going to be a theme for every sector next year, not just tech stocks. The 11 million job openings for just eight million unemployed mean companies just can’t get enough workers. That’s going to mean higher wages and lower profitability for a lot of sectors…and lower stock prices for it.
Now tech is less labor intensive, needing fewer workers than you’d see in retail or services companies but it’s still going to get hit here. You’ll want to look for companies with more ecommerce exposure or more of their product sold through digital platforms.
Will Tech Stocks Do Well in 2022?
Tied in with that inflation picture is interest rates and this is the big question mark for tech stocks. For example, when the rate on the 10-year Treasury jumped from 1% to 1.7% in February and March, tech stocks in the Nasdaq 100 crumbled by nearly 20% and other tech funds plunged.
That has a lot to do with how stocks are valued on something called the Discounted Cash Flow model. This says that a stock is work all the future cash flows of a company, but for that future cash flow, you have to discount it to find a present value. Basically you use an interest rate to find what that future cash is worth today.
Well, as that interest rate increases then the future value of those cash flows decreases and the stock value decreases. For companies like tech stocks where most of the cash flows are far off into the future, an increase in interest rates can really drive those values lower fast.
Now the recent increase in interest rates hasn’t brought another selloff in tech stocks but most expect rates to keep rising through next year and that could eventually hit the group again.
I’ll show you those two tech ETFs to watch and the stocks to buy next but first, I want to get your input on this. With everything tech is facing in 2022; the chip shortage, higher wages and interest rates…do you think the sector will outperform again? So scroll down and let me know in the comments below, do you think tech stocks will do well in 2022, why or why not?
Before those seven tech stocks to buy, I want to highlight two tech ETFs, exchange traded funds, that can be good substitutes for individual stocks.
First is one of my favorites, the Global X Nasdaq 100 Covered Call ETF, ticker QYLD. The fund invests in the tech-heavy Nasdaq, the largest tech companies in the index, and then uses the covered call strategy for income, paying a 12% dividend yield on monthly payments.
This is one we highlighted in a video a few weeks ago, comparing income ETFs using the options strategy and there’s a lot to like here. Besides that solid return from tech stocks and the high dividend yield, this one should do well even if tech stocks don’t take off next year. You’ll still get that income yield from the option strategy.
This next one isn’t necessarily a must-buy tech fund, but the ARK Innovation Fund, the ARKK, is a great fund to watch for stock ideas and research. The fund run by Cathie Wood and the team at ARK Invest is filled with fifty of the strongest tech growth stories.
The ARK website will show you exactly what they’re watching for tech growth, what the funds are buying and even share some of the research they use. The fund itself is up 40% annualized over the last five years so hard to go wrong with that kind of a return as well.
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Turning to those tech stocks to buy, all you out there in the Nation know I’m a macro type of investor. That means I start with the top-down, the big economic forces, and use that to pick which industries and which stocks I want to buy. With that, we can look at the six groups within tech; communications equipment, electronic equipment, IT services, semiconductors, software and hardware and we see here the industry returns for different periods.
And we see those first three industries, equipment and services, have really lagged the rest and that’s because these are largely dependent on business spending which has been slow to recover and was even weak before the pandemic. Instead of equipment and services, a lot of businesses are spending more on software which is one of the best-performing industries.
Besides software, I also think semiconductors can continue to do well even in the face of that shortage and supply-chain issues. This industry is going through a huge growth period right now and that’s going to drive returns.
In that semiconductors theme, I’ve found three tech stocks with great value and for three different reasons.
Tech Stocks with Great Value and Why You Should Buy
And the first stock to watch in that semiconductor play is Skyworks Solutions, ticker SWKS, a premier supplier of radio-frequency components in smartphones and electronics. That 5G rollout is still in its infancy but is going to lead a revolution in connecting every electronic device and that’s going to mean more chip demand.
Shares are down 18% from the mid-year peak on worries over iPhone production. Apple is rumored to be cutting its target by as many as 10 million phones from 90 million on chip shortages from other suppliers like Broadcom. The demand for iPhones is still strong, which is good for Skyworks because it gets about 56% of total revenue from Apple.
Revenue was up 58% in the first nine months of the year versus last year and the company has a super-strong balance sheet with almost $3 billion in cash against just $1.66 billion in debt. Shares here are trading for about six-times sales which is lower than the eight-times average for last year though still expensive versus the low of three-times sales multiple in 2018.
The average analyst target of $210 a share is up 25% from here and I think you’ve got at least a few really good years of revenue growth in this currency semiconductor cycle.
A little larger here at $40 billion market cap is Microchip Technology, ticker MCHP, a leader in 8-bit microcontroller chips at the lower computing power end of the scale. These are typically for electronics that don’t require as much processing power like thermostats, electric razors…a lot of your household items.
Now that’s important for two reasons. First is that these ‘dumb’ chips don’t make up much of the cost for electronics so manufacturers don’t shop around much and will stick with a supplier like MCHP. Also is that Microchip doesn’t have to spend as much on research and development creating the next generation of super-chips.
For example, Microchip had R&D costs that amounted to just 15% of sales over the last 12 months. Compare that with Nvidia which spent 21% of its sales to keep up with changes in chip technology and you can see how MCHP can produce higher profitability.
Now the balance sheet isn’t quite as strong as I usually like to see with just $280 million in cash against $8.6 billion in debt but it’s a stable cash-flowing company. Shares are also more expensive at 7.2-times sales so if I had to choose just two semiconductor stocks, I would go with Skyworks and our next pick.
That said, the average analyst target of $90 a share for Microchip is still 22% higher and this one will benefit from that years-long growth as well.
Next here is our contrarian stock of the group, Intel, ticker INTC, which has gotten no love from investors lately.
Shares are down 28% from the five-year high set in March on news of a new CEO and a turnaround plan and the stock plunged 12% late October on disappointing third-quarter earnings.
It’s obvious the turnaround will take longer than expected but the company is making solid progress on its new products including the Meteor Lake and Alchemist. Even though the third quarter disappointed, revenue growth in its Mobileye and IoT group were strong. The company is still producing over $12 billion in free cash flow a quarter and targeting 10- to 12% annualized revenue growth over the next five years.
Intel acquired systems leader Mobileye in 2017 and has data-sharing agreements with Volkswagen, BMW and Nissan. It’s gathering five million miles of data every day and could help it produce one of the most advanced autonomous systems.
Mobileye is developing its commercial fleet robo-taxi technology for launch over the next year that could be a game-changer. Mobileye posted growth of 39% in revenue to $326 million last quarter and it’s just getting started.
When it comes down to it, investing in Intel here is about valuation and whether you believe it can carve out a piece of the market again. The broader market doesn’t yet which is why you can get the shares for a price of just 2.6-times sales…that’s about a fourth the valuation on shares of AMD. So even on a still-modest 5-times sales multiple, you’re looking to double your money on Intel.
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Software applications is where the growth will always be in tech stocks and I’m buying two stocks in the theme for 2022.
Our first tech stock in applications is $54 billion Docusign, ticker DOCU, the leader in cloud-based e-signatures and contract management. The signature market alone is a $25 billion opportunity according to the company and as much as $50 billion for the broader cloud agreement market. There’s some disagreement on actual market size but it’s definitely in the tens of billions.
The company’s at $1.8 billion in revenue now, so about 3% of the market, and it’s really a two-horse race here between Docusign and Adobe. The company already has over a million customers and very strong retention, so I’d like to see it expand a little more aggressively into other products like its notary services and agreement management to cross sell and compete.
Like a lot of the stocks in software, you’re paying for growth here. Shares trade for a price of 30-times revenue…which is growing at 50% a year but remember those price multiples of five- to ten-times in semiconductors so this is even more expensive.
The company is making progress though. Besides that 50% sales growth, it’s also getting more efficient, improving the operating margin from ten-percent last year to 20% this year. So higher revenue and higher profitability on that revenue.
For comparison, Adobe books $15 billion in annual sales and 36% operating margin but is only growing sales by 22%…still not bad but about half the pace of Docusign.
It’s a bet on the future but the average analyst target is for $324 a share which is 16% higher and just over the 50-week high set in August.
This next tech stock, Citrix Systems, ticker CTXS, is an interesting case because it’s one of those legacy tech companies repositioning into the newest trends.
Citrix enables employees to access a company’s applications and data securely in the cloud, allowing for a mobile workforce on any device and in any location.
That’s obviously been a huge theme over the past year but the company has had some execution issues so it hasn’t benefited quite as much as you’d expect. It’s had to work to transition from a legacy on-premise product model to that cloud-services model but it is making headway. Recurring revenue from subscription services grew to $1.6 billion last quarter, up 46% from a year ago and it’s a great indication of the company’s transition.
Against this, the company has had management issues, going through four CEOs in six years and with private equity investors pushing for a change since 2015. The company is actively looking to sell off non-performing parts of the business and an outright sale wouldn’t surprise me.
Total revenue grew just 1.6% to $3.2 billion over the last year but that theme of virtualization is a strong one and I think the shares should bring a higher valuation than the 3.8-times sales it’s getting now. That price-to-sales is a 34% discount to the average 5.1-multiple over the last three years and the average analyst target of $113 per share is 20% higher.
I’ve got two more stocks to watch, both in the ecommerce segment that should continue to boom on a digital transformation.
I’m torn on shares of Alibaba Group, ticker BABA, an excellent company and way undervalued but I’m not sure any Chinese company is investable quite yet.
On the one hand, the group of companies serves more than a billion users, up more than 140 million in the first half of the year. Alibaba amounts to 15% of the total retail sales in China, the second-largest economy in the world and grew total revenue by 34% in the June quarter, with 54% growth internationally.
Analysts expect sales to rise 26% to $141 billion this year for $10.78 in per share earnings. That puts the stock at just 3.3-times on a price-to-sales basis and 15.8-times earnings. Compare that to Amazon, which is an almost identical business model, that trades for 3.9-times sales and 58-times earnings and you see how cheap the shares are. On that comparable price-to-sales basis, Alibaba could be worth 18% more and shares would be 267% higher on a price-to-earnings comparable.
Of course, the wildcard here is the Chinese government and I think the recent crackdowns are more than just a socialist government trying to take more control. China is facing some serious economic problems with its property sector and wants to control capital flows as closely as possible heading into 2022. That’s why it’s clamping down on cryptocurrencies and companies.
Analysts have an average target for Alibaba of $242 per share, 42% above the current price and an eventual run back to the $311 high would be an 83% return, but I think you wait into 2022 to watch the economy and start buying the stock. Even with the risks though, this is a very strong company and outside the possibility of a total collapse of China stocks, it should do very well for investors.
Paypal Holdings, ticker PYPL, is my favorite ecommerce play and way undervalued on future potential.
The company serves more than 370 million active accounts, up 19% in the most recent quarter to nearly $24 billion. That puts it around 11-times on that price-to-sales basis which is a little expensive but there’s reason to believe the company can grow revenue exponentially in the next few years.
We could be on the verge of a revolution in digital banking and research by ARK Invest estimates each digital wallet customer could be worth as much as $20,000 based on being able to cross-sell financial services like credit, insurance and brokerage as well as other ecommerce revenue.
Now consider that PayPal has more than 70 million users for its Venmo wallet app and accounts for just $15 billion of the company’s $270 billion total valuation. Right now, the market is only valuing those wallet users at about $250 each. So even if Paypal can reach half that monetization estimate on wallet users to $10,000 each, that would boost the market cap of the stock to almost a trillion dollars, nearly four-times the current price.
Beyond that hidden value, Paypal is constantly adding services that bring more people into the app. From the QR code program that’s putting it in the point-of-sale space to Venmo and Crypto which in less than three months after rolling it out, over two-thirds of PayPal users had used the Crypto service. The company has the financial power to develop or acquire anything it needs to grow.
That 4X return isn’t going to happen overnight but shares are down 25% from the recent high and the average analyst target of $325 per share is a 40% upside. Earnings are expected up 24% next year to $5.88 per share on almost $32 billion in revenue which brings the stock back below 9-times on a price-to-sales basis.
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