Wall Street witnessed a broad-based decline in 2022 with the technology sector suffering the most. Technology, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, suffered owing to overvaluation, a high-interest-rate regime and tighter monetary control adopted by the Fed to combat 40-year high inflation.
However, a very early sign of a rebound in the technology sector is clearly visible this year. Several measures of inflation for the last three months have indicated that peak inflation seems behind us. Consequently, the Fed has reduced the magnitude of interest rate hike from 75 basis points to 25 basis points.
Sector Churn in Early 2023
The tech-heavy Nasdaq Composite plummeted 33.1% year over year and 32.9% from its all-time high in 2022. On the other hand, of the 11 broad sectors of the S&P 500 Index, the Technology Select Sector SPDR (XLK) and the tech-laden Communication Services Select Sector SPDR (XLC) are currently trading at a 13.6% and 21.3% discount, respectively, from their 52-week highs.
Consequently, the technology sector is no longer overvalued. We are seeing early signs of market participants’ confidence returning to this sector. This trend is likely to get further momentum in 2023.
Of the three major stock indexes — year to date — the tech-heavy Nasdaq Composite has rallied 13.8% while the Dow and the S&P 500 have risen 2.4% and 7.3%, respectively. Year to date, the XLK and the XLC have gained 15.4% and 22.1%, respectively.
Technology is the Best Bet for the Long Term
Last year’s meltdown of the technology sector was a temporary phenomenon. The fundamentals of this sector are rock solid. We must not forget that the growing demand for hi-tech products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, Artificial Intelligence, self-driving vehicles, digital personal assistants and Internet of Things, has bosted the overall space.
The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data serve most of their needs. Even those using smartphones, rarely utilize online digital features.
However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons for other countries.
Even those who are less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now feeling the massive advantage of online platforms.
Our Top Picks
We have narrowed our search to five large-cap (market capital > $10 billion) U.S.-based technology stocks with attractive valuations. The stocks have strong growth potential for 2023 and have seen positive earnings estimate revision in the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks in the past month.
Image Source: Zacks Investment Research
salesforce.com inc. (CRM – Free Report) is benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions is driving demand for CRM’s products. CRM’s sustained focus on introducing more aligned products as per customer needs is driving its top-line.
Continued deal wins in the international market are the other growth drivers. The acquisition of Slack would position salesforce.com as a leader in the enterprise team collaboration solution space and help it compete better with Microsoft’s Teams product. We expect CRM revenues to witness a CAGR of 12.5% during fiscal 2023-2025.
salesforce.com has expected revenue and earnings growth rates of 10.9% and 18.2%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 1.2% over the last 30 days. The stock price of CRM is currently trading at a 23.7% discount from its 52-week high.
ServiceNow Inc. (NOW – Free Report) is benefiting from robust growth in subscription revenues as reflected by its strong fourth-quarter 2022 results. NOW is riding on the increasing adoption of its workflows by enterprises undergoing digital transformation.
As businesses, government agencies and others continue to move their infrastructure to cloud, the company is poised to boost the uptake of its Now platform. Further, NOW’s expanding global presence, solid partner base and strategic buyouts are expected to bolster growth prospects. Strategic alliances with the likes of Microsoft remain tailwinds.
ServiceNow has expected revenue and earnings growth rates of 21.9% and 20.8%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 2% over the last 30 days. The stock price of NOW is currently trading at a 25.3% discount from its 52-week high.
Okta Inc. (OKTA – Free Report) provides identity management platforms for enterprises, small and medium-sized businesses, universities, non-profits, and government agencies in the United States and internationally.
OKTA’s product consists of Okta information technology Products and Okta for Developers. Okta IT Products include Single Sign-On, Mobility Management, Adaptive Multi-Factor Authentication, Lifecycle Management and Universal Directory. Okta for Developers include Complete Authentication, User Management, Application Programming Interface Access Management and Developer Tools.
OKTA has expected revenue and earnings growth rates of 16.6% and more than 100%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the last 30 days. The stock price of OKTA is currently trading at a 62.8% discount from its 52-week high.
Unity Software Inc. (U – Free Report) provides a platform for creating and operating interactive, real-time 3D content. U’s platform provides a set of software solutions to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles and augmented and virtual reality devices.
Unity Software enables content creators and developers, artists, designers, engineers, and architects to create interactive and real-time 2D and 3D content. U offers its solutions directly through its online store, field sales operations, independent distributors, and resellers in the United States and internationally.
Unity Software has expected revenue and earnings growth rates of 58.3% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 4% over the last seven days. The stock price of U is currently trading at a 69.6% discount from its 52-week high.
Splunk Inc. (SPLK – Free Report) has been gaining traction from healthy customer engagement, evident from the consistently high net retention and competitive win rates alongside solid momentum with large orders overall.
SPLK is improving the resilience and security of its critical system and driving efficiencies within its own internal operation. Also, the business transition from perpetual licenses to subscription or renewable model is expected to benefit it in the long run. SPLK’s top line is benefiting from high demand for its cloud solutions.
Splunk has expected revenue and earnings growth rates of 14.9% and 41.7%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.8% over the last seven days. The stock price of SPLK is currently trading at a 29.9% discount from its 52-week high.
