Key Takeaways:
The technology sector has sold off as institutional investors continue to transition from high-growth equities to cyclical ones. In an attempt to capture the “reopening” plays, most investors are betting on the stocks that were hit hardest over the course of the pandemic to outperform their tech counterparts. As a result, many of the best tech stocks which were overvalued at the end of last year are starting to look a lot more attractive to investors. While many of the best tech stocks are still overvalued, despite a significant correction, some undervalued stocks still exist. Whether it is underlying fundamentals or their ability to disrupt entire industries, some tech stocks can’t be ignored. That said, here are some of the best tech stocks for beginner investors in 2021.
5 Best Tech Stocks To Buy Now
The best tech stocks in the market are in constant flux. For a variety of reasons, whether its valuations or unique indicators related to individual companies, the best tech stocks are never sitting still. That said, long-term secular tailwinds and unique opportunities have dubbed the following tech companies some of the best to watch in 2021:
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Microsoft Corporation (NASDAQ: MSFT)
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Airbnb, Inc. (NASDAQ: ABNB)
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DocuSign, Inc. (NASDAQ: DOCU)
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Pinterest, Inc. (NYSE: PINS)
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NVIDIA Corporation (NASDAQ: NVDA)
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Microsoft Corporation
Microsoft has not only become synonymous with today’s top tech stocks but it’s also taken its place amongst the pantheon of the world’s greatest companies across every industry. Thanks to Windows operating systems and the Office suite of software, Microsoft remains a necessary tool for just about every business which requires a computer to facilitate daily operations. With a market cap of approximately $1.94 trillion, there’s no doubting Microsoft’s place amongst the greatest technology stocks, but new investors can’t get caught up in how Microsoft got to be a pioneer in the tech space; they need to evaluate where the company can be in the future. Despite its prolific track record, Microsoft’s future looks brighter than ever, and new investors would be wise to consider adding this company to their own portfolio.
Up well over 700% in the last decade, it’s easy to assume Microsoft’s valuation doesn’t warrant adding the tech giant to a new investor’s portfolio. However, the company’s Price to Earnings (P/E) ratio suggests the stock can be had at a relatively affordable value. Microsoft’s 38.81x P/E ratio is well below the industry average of 50.14x. More importantly, today’s investors look like they’ll be able to acquire a great company with plenty of growth potential.
Not only will Microsoft continue to dominate the workplace software market, but its latest venture into cloud computing looks like it will be able to take advantage of the long-term secular tailwinds being kicked up by cloud-based technologies. Azure, Microsoft’s cloud computing division, is already an industry leader in an area that’s likely to disrupt the entire tech sector. In addition to its leading position in the cloud computing industry, Microsoft’s track record will serve as a solid foundation for new investors to build off of.
Airbnb, Inc.
Airbnb represents the “best in class” of a new generation of travel and hospitality companies. As its name suggests, the company operates an online portal connecting prospective travelers with a global network of “hosts.” Airbnb is simultaneously a cost-effective solution for lodging and a more enriching travel experience for its users. It is worth noting, however, that—at its core—Airbnb is a technology company. While the company prides itself on helping guests find lodging in more than 220 countries, the truly disruptive aspect of Airbnb’s business model is the technology on its platform.
While Airbnb is uniquely positioned to succeed over the long run, the company appears ready to benefit from several immediate tailwinds. In particular, the reopening of the global economy will serve as a significant catalyst for growth. As more people become vaccinated and the pandemic is brought under control, pent-up travel demand will send many people in Airbnb’s direction. In fact, it is safe to assume business will reach new levels as fear and uncertainty onset by COVID-19 dissipate. Analysts expect more people to choose Airbnb for its more secluded nature. As opposed to staying in hotels with hundreds or thousands of people, there’s a good chance Airbnb will see an influx of demand for detached homes (away from the masses).
At the moment, Airbnb is overvalued (like many of its tech counterparts which enjoyed a historic run in 2020). However, the company looks like a great addition to any long-term portfolio. Few companies have the disruptive potential like Airbnb does, which should help it separate itself from the competition. That said, Airbnb only needs to capture a small portion of the travel industry’s market cap to realize success. Investors who get in at the right price may find Airbnb to be a generational opportunity.
DocuSign, Inc.
DocuSign is an internet technology company that operates primarily through the cloud to facilitate e-signature and other cloud-based transaction products and services. DocuSign’s customers can digitally prepare, sign, act on, and manage everything from agreements to transactions. The ability to sign any document from your own home was already growing in popularity, but the pandemic pulled a lot of business forward. Subsequently, DocuSign benefited immensely from government-mandated quarantines on a global scale.
DocuSign does appear to be overvalued in today’s market. With a Price to Sales ratio of 24.69x, DocuSign is actually trading as one the highest valued equities in the software industry. However, it’s become commonplace for some of the most promising companies to demand a premium valuation, and DocuSign doesn’t appear to be an exception. In fact, we may look back at today’s valuation and consider it cheap in ten years. At the very least, DocuSign has the potential to disrupt not only the software industry but every industry for that matter.
Moving forward, DocuSign could replace traditional “paperwork” as we know it. As the world transitions to a digital future, the need to conduct more business online will increase exponentially, and DocuSign will reap the rewards.
Pinterest, Inc.
Pinterest is a social media platform that specializes in image sharing. Users may use the Pinterest platform to create unique and personalized pinboards based on their particular interests. The technology allows people to curate and share images with the platform’s millions of users.
Pinterest trades at a premium valuation. With a Price to Sales ratio of 16.16x, Pinterest trades well above the interactive media and services industry median P/S ratio of 5.47x. However, much like most of today’s best stocks, investors will need to pay up for quality. In the case of Pinterest, investors are likely willing to pay for what the company can become, as opposed to what it currently is.
Pinterest’s true potential lies in its ability to implement a targeted marketing campaign without bothering or interfering with users’ time on the platform. In fact, ads are part of the experience Pinterest users have come to know and love. Companies may target “Pinners” with their own ads without inundating users with content they don’t want. In fact, Pinterest users appreciate ads that point them in a new direction. As a result, Pinterest has the ability to become a powerhouse in the ad industry.
NVIDIA Corporation
Nvidia has developed a reputation as one of the world’s top tech stocks and is a leading producer of programmable graphics processor technologies. Of its primary business segments, Nvidia is best known for its graphics processing units, media and communications processors, and handheld and consumer electronics. As perhaps the premier semiconductor business across the entire globe, NVIDIA is well-positioned to assist in the event of technology.
Nvidia has an established track record with positive earnings. As a result, investors will want to emphasize the company’s P/E ratio when attempting to evaluate it properly. In doing so, new investors will quickly learn that Nvidia is an expensive stock. In particular, Nvidia’s 89.22x P/E ratio is one of the highest in the semiconductors and semiconductor equipment industry. Nonetheless, Nvidia is a stock many investors are willing to pay up for because of the company’s immense potential.
Nvidia has already proven it belongs in the discussion of today’s best tech stocks; its track record speaks for itself. However, it’s the future that has investors excited. The company designs the chips which are necessary for graphics and computing accelerators in data centers. Nvidia’s chips are expected to power almost every long-term secular technology trend, from artificial intelligence to the cloud. The ability of Nvidia to increase computing power to meet the needs of the latest technology is not only important, it is necessary. As a result, Nvidia should remain a great tech stock for new investors for years to come.
How To Analyze Tech Stocks
To be clear, there isn’t a single valuation strategy that works for every single tech stock. Therefore, learning how to analyze tech stocks requires investors to learn several valuation strategies.
The first step in analyzing a tech company will usually be determining whether or not the company is actually profitable. As many of today’s tech stocks are purely speculative, a great deal aren’t even profitable. As a result, investors will want to determine where their particular tech stock resides: Is it profitable or not?
If the tech stock is profitable, investors can usually turn to the Price to Earnings ratio. As its name suggests, the Price to Earnings ratio is the ratio of a company’s share price to its earnings per share. This particular ratio is used to determine whether or not a company is properly valued. The higher the price-to-earnings ratio, the more value the market is placing on future earnings growth.
Not all tech companies are profitable; many of them are either too new or are reinvesting back into the company. As a result, the Price to Earnings ratio isn’t particularly useful in valuing tech companies without profits. Instead, investors will want to pay special considerations to the company’s revenue growth. A tech company with strong revenue growth suggests a bright future. Unprofitable tech companies with strong revenue growth will exhibit a propensity towards increasing their bottom line. Strong revenue growth makes it more likely for a company to transition from losses to profits.
Summary
The best tech stocks for new investors represent the unique convergence of opportunity and valuation. If for nothing else, even the best tech companies at an unfair valuation may not represent a good buying opportunity. Investors need to find the companies with long-term secular tailwinds which are currently trying at valuations that don’t yet reflect the company’s full potential. In identifying the best tech stocks with plenty of room to grow, investors may find today’s valuations to be a bargain. Consequently, the stocks listed above may represent the perfect opportunity to gain some long-term exposure to the technology industry for new investors.
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