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Tech stocks have historically been a solid investment, with strong growth prospects driven by innovation, market expansion, and an increasing reliance on technology in all aspects of life.
Now, with the artificial intelligence (AI) revolution, tech companies with financial resources are at the forefront of major innovations that will shape the future. Here are two powerful tech companies that can capitalize on emerging technologies and have significant growth potential.
#1. Meta Platforms
Meta Platforms (META) (formerly Facebook) is known for its social media platforms, Instagram, Threads, WhatsApp, and more. However, in recent years, it has shifted its focus away from social media dominance and toward becoming a leader in the emerging fields of virtual reality (VR) and the metaverse. Meta recently posted a strong third quarter, beating analysts’ consensus estimates.
META stock has gained 65.2% YTD, outperforming both the S&P 500 Index ($SPX) and the tech-heavy Nasdaq Composite ($NASX).
Meta remains a social media industry leader, with billions of active users across its core platforms (Facebook, Instagram, and WhatsApp). During the Q3 earnings call, CEO Mark Zuckerberg boasted that over 3.2 billion people use at least one of these apps on a daily basis. To keep users engaged and increase ad spending, the company has also included shopping features, short-form video content (Reels), and AI-driven content discovery.
In the third quarter, advertising revenue increased by 18.5% to $39.8 billion, driven primarily by its Family of Apps segment. The Reality Labs segment (which focuses on VR and the metaverse) also reported a 28.5% increase in revenue. However, it reported an operating loss of $4.4 billion. Total revenue in the quarter increased by 19%, while diluted earnings rose by 37% to $6.03 per share.
Meta's significant investments in its Reality Labs division continue to put pressure on the company's margins. Despite short-term financial pressures, CEO Mark Zuckerberg is still committed to long-term growth in this sector.
The company generated $15.5 billion in free cash flow, and Meta paid out $1.3 billion in dividends during the quarter. The company paid off $10.5 billion in debt during Q3, leaving it with $70.9 billion in cash and $28.8 billion in debt.
While the metaverse is still in its early stages and will require significant investments in the near future, I believe it offers ample long-term opportunities for the company.
Undoubtedly, Meta's social media business continues to drive advertising growth, but the real question is whether its metaverse ambitions will succeed. Analysts believe Meta has the ability to execute its metaverse strategy and continue driving growth in its advertising business using AI.
Analysts who cover Meta stock forecast earnings to increase by a whopping 52.2% in 2024 and 11.7% in fiscal 2025. Trading at 23 times forward earnings for 2025, Meta’s stock is a reasonable buy in the tech and AI space.
Despite the expected short-term volatility, I too believe Meta's investments in virtual reality will position it for significant long-term growth. Overall, Meta is a “strong buy” on Wall Street. Out of the 50 analysts covering META, 42 rate it a “strong buy,” two recommend the stock as a “moderate buy,” four suggest it is a “hold,” and two rate it a “strong sell.” The average price target of $650.74 implies an upside potential of 11.6% from current levels. Furthermore, the Street-high estimate of $811 suggests the stock could rally 38.7% in the next 12 months.
#2. Microsoft Corporation
Microsoft Corporation (MSFT), valued at $3.1 trillion, has been a consistent leader in the technology sector, with a diverse portfolio that includes software, cloud computing, AI, gaming, and hardware. Its presence in both the consumer and enterprise markets places it among the most important players in the global technology sector.
Furthermore, its collaboration with OpenAI and the integration of AI capabilities into its suite of products have established it as a leader in applied AI, resulting in a strong start to fiscal 2025.
So far this year, Microsoft stock has gained 12.7% year-to-date, compared to the tech-heavy Nasdaq Composite’s gain of 28.5%.
Yet again, Microsoft reported strong performance across its core segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing. Revenue increased by double digits in all three segments in the first quarter of fiscal 2025.
Microsoft Azure has increased its market share in cloud computing, directly competing with Amazon's (AMZN) AWS (Amazon Web Services). Azure's rapid growth rate remains a key driver of Microsoft's top and bottom-line results.
MSFT reported a 16% year-over-year revenue increase to $65.6 billion, driven by strong growth in its cloud business and subscription-based services. Microsoft Cloud alone generated $38.9 billion in revenue, a 22% increase in the quarter.
Adjusted earnings rose 10% year on year to $3.30 per share, surpassing consensus estimates. This displays Microsoft's ability to increase profitability, despite investing in emerging technologies.
CEO Satya Nadella stated, “AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process.” Management expects the company's AI business to exceed a $10 billion annual revenue run rate by the next quarter.
With a free cash flow of around $19.2 billion, Microsoft is well-positioned to fund R&D, make acquisitions, and continue to return capital to shareholders. In Q1, it distributed $6.2 billion in dividends and $2.8 billion in share repurchases.
Management also announced a 10% dividend increase to $0.83 per share. MSFT has a forward dividend yield of 0.79%, compared to the tech sector's average of 1.4%. It has increased dividends for the last 23 years.
Microsoft's growth prospects remain strong, thanks to advances in AI, cloud computing, and productivity solutions. Therefore, the stock is a “strong buy” on Wall Street. Out of the 40 analysts covering MSFT, 34 rate it a “strong buy,” three recommend the stock as a “moderate buy,” and three suggest it is a “hold.” The average price target of $504.45 implies an upside potential of 19.2% from current levels. Furthermore, the Street-high estimate of $600 suggests the stock could rally 41.8% in the next 12 months.
Analysts who cover Microsoft stock forecast earnings to increase by 10.9% in fiscal 2025 and 15.2% in fiscal 2026.
Trading at 32 times forward earnings for 2025, Microsoft stock is expensive. However, its steady gains and resilient growth, despite market volatility and broader economic headwinds, make it a strong investment for the long term.
