The technology sector is vast, encompassing gadget makers, software developers, wireless providers, streaming services, semiconductor firms and cloud computing providers – just to name a few. Any company that sells an item or service heavily infused with technology likely falls within this field.
Software companies are increasingly adopting a software-as-a-service model, where customers purchase an annual subscription to a program instead of purchasing a one-time license. This arrangement generates recurring revenue for the software company.
Semiconductor chips provide the power behind today’s devices. Companies producing semiconductor chips design and/or manufacture central processing units (CPUs), graphics processing units (GPUs), memory chips, and many other types of chips that enable modern devices to function.
Telecom companies offering wireless services are classified as part of the tech sector, along with video streaming companies offering easy access to high-quality content and cloud computing providers that power these streaming services.
The Top Tech Stocks to Watch in 2023
Technology companies are among the world’s most valuable companies. Here is a list of some of the most prominent and impressive technology stocks that investors should take into account:
Amazon.com (NASDAQ:AMZN) is the world’s largest online retailer and provider of cloud computing infrastructure. Jeff Bezos stepped down as founder in July, ushering in a new chapter for this dominant tech company.
Microsoft (NASDAQ:MSFT) is a widely-recognized software giant best known for its Windows PC operating system and Office productivity suite. Furthermore, it’s the second-largest provider of cloud infrastructure services.
Apple (NASDAQ:AAPL) produces the iPhone, iPad and Mac computers. Their strong customer loyalty ensures a steady flow of repeat buyers, and an expanding range of services further cements Apple’s ecosystem as a desirable destination.
Intel (NASDAQ:INTC) is one of the world’s largest semiconductor companies. They design and manufacture central processing units (CPUs) for PCs and servers, as well as specialty chips used in artificial intelligence applications. Intel is investing heavily in manufacturing with plans to supply chips to other firms.
Netflix (NASDAQ:NFLX) is the undisputed leader in video streaming, investing billions of dollars annually into creating engaging content to keep their subscribers engaged.
Meta Platforms (NASDAQ:META) is the world’s largest social media company, boasting more than 2 billion daily active users across Facebook, Instagram, Messenger and WhatsApp. The company sees virtual reality as its future growth driver.
Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is the parent company of Google (NASDAQ:GOOG) and Android, the widely popular operating system for smartphones.
Meta (formerly Facebook), Amazon, Apple, Netflix and Alphabet (Google) are often referred to collectively as the FAANG stocks. These companies have been dominating their industries for years and their stocks have produced impressive returns over that period. Unfortunately, in 2022 nearly every major tech stock plunged along with the general market.
Tech Stocks, COVID-19, and the Bear Market
In March 2020 it was impossible to accurately forecast how tech companies would fare as the COVID-19 pandemic crippled economies and caused massive job losses. Some tech firms experienced immediate negative repercussions – Alphabet and Meta specifically experienced big slowdowns in revenue growth as hard-hit industries like travel and hospitality cut back on advertising spending.
Other tech companies experienced great success. Amazon experienced an uptick in e-commerce sales as consumers shied away from stores, while Netflix saw a rise in subscribers as home-bound viewers had more time for TV watching. Meanwhile, demand for PCs, smartphones, and other gadgets drove sales for Intel, Microsoft, and Apple – thanks to limited spending options and unprecedented stimulus cash. As a result, many tech firms reported record revenue and profits during this period.
Yet 2022 marked the beginning of the golden period of the pandemic’s decline. In response to soaring inflation, the Federal Reserve Board swiftly increased interest rates, putting pressure on consumer spending. When supply systems improved and pandemic-level demand decreased, shortages transformed into gluts. Therefore, stock markets throughout the globe tumbled into bear market territory, with IT companies among the worst performers.
Amazon significantly expanded its e-commerce and cloud computing capacity during 2020-2021 to meet unprecedented levels of demand. Unfortunately, the company overbuilt on the e-commerce side, spending the second half of 2022 closing some warehouses to reduce costs. Meanwhile, cloud computing started slowing down in 2022 too – potentially due to excess capacity issues there as well. Once-record profits from during the pandemic have quickly evaporated – Amazon reported a $3 billion net loss through nine months in 2022.
Microsoft was fortunate to experience strong PC sales during the pandemic. Sales volumes reached their highest point in a decade, ending a long streak of declines. Working and learning from home combined with stimulus cash fuelled the boom – but that boom has now turned into an historic bust: global PC shipments were down 16% in 2022 with an appalling 29% year-over-year decrease in the fourth quarter alone. A further decline is forecast for 2023 which puts pressure on many of Microsoft’s products that rely on PCs.
Intel has been particularly hard-hit by the declining PC market. After seeing its market share slip away to rival Advanced Micro Devices (NASDAQ:AMD) over recent years, Intel made a comeback in 2021 and 2022 with Alder Lake and Raptor Lake PC CPUs. While these products proved successful, they’ve been sold into one of PCs worst downturns ever seen – all while Intel continues to invest tens of billions annually into expanding its manufacturing capacity just as semiconductor prices begin to dip.
Netflix added subscribers at an unprecedented pace in 2020, but its fortunes turned as competition intensified. North American Netflix began losing subscribers in 2021 due to demand being pulled forward and an influx of high-quality alternatives like Disney+ (NYSE:DIS), HBO Max (CBS.TV), and many smaller streaming services offering consumers more choices than ever before. As a result, Netflix has taken the defensive by changing their policies regarding ad-supported plans and working to reduce expenses.
Facebook changed its name to Meta Platforms in 2021 to emphasize its focus on virtual reality and the metaverse. While advertising revenue from its social media apps remains its primary source of income, a challenging economy in 2022 and privacy changes from Apple on iOS devices have presented new obstacles. While advertising revenue continues to decline, Meta is investing billions of dollars annually into its metaverse initiatives with almost nothing to show for it yet.
Alphabet’s revenue growth slowed drastically in 2022, with revenue up just 6% year over year in the third quarter. While Google Cloud business is expanding rapidly, core advertising revenues are facing an uncertain economy. Beyond macroeconomic concerns, cash-cow search businesses may face an existential threat from AI-powered services like OpenAI ChatGPT that took the world by storm late 2022; Microsoft also invested heavily.
Analyzing Tech Stocks
For mature tech companies that generate profits, the price-to-earnings ratio is an effective metric. Divide stock price by per share earnings and you get a multiple that indicates how highly the market values current earnings for the business. The higher this number is, the greater value investors place on future earnings growth prospects.
Many tech companies aren’t profitable, so the price-to-earnings ratio cannot accurately assess them. Revenue growth is more important for younger firms. Before investing in something unproven, make sure it has strong growth prospects.
Unprofitable tech companies must strive to turn their losses into profits. As the business expands, efficiency should increase – particularly when it comes to sales and marketing spending that close deals. If spending is growing faster than revenue growth, that could indicate something is amiss.
Finally, a great tech stock is one that trades at a reasonable valuation given its growth prospects. But accurately determining those growth prospects can be challenging. If you anticipate earnings to soar in the coming years, paying more for the stock could make sense; but if those projections prove incorrect, your investment may not pan out as planned.
Investing in an exchange-traded fund (ETF) that specializes in tech stocks is one way to reduce the risk of making mistakes. The Ark Innovation ETF (NYSEMKT:ARKK) is one such option, though its bets on high-flying tech stocks may prove less secure than investing directly in some of the listed tech giants.
Investing in tech stocks can be risky, but you can minimize that danger by investing only when you feel confident their growth prospects justify their current valuations.
