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Investors’ enthusiasm for tech stocks has skyrocketed over the past year thanks to the tremendous buzz surrounding artificial intelligence (AI), pushing the broader market indexes to record highs in recent months.
Joining investors’ enthusiasm, economic experts are also highly bullish on AI’s prospects, foreseeing it as potentially the most transformative development in economic history since the Industrial Revolution. With most companies rushing to capitalize on AI’s capabilities, identifying stocks with a sustainable competitive advantage, commonly known as a "moat," becomes essential.
That said, Morningstar analysts are bullish on Alphabet Inc. (GOOGL), Amazon.com, Inc. (AMZN), and Meta Platforms, Inc. (META). The investment research firm believes that these three tech giants have a “Wide Moat,” which means they have the potential to maintain their competitive edge for a solid two decades.
Tech Stock #1: Alphabet
Boasting a huge market cap of $2.1 trillion, Mountain View, California-based Alphabet Inc. (GOOGL), Google’s parent company, has evolved far beyond its roots as a search engine giant. Alphabet’s vast array of offerings, such as Gmail, Google Drive, Google Maps, Google Photos, and YouTube, play a pivotal role in our daily lives. Moreover, while the company holds a dominant position in the search engine market, it is also leveraging the immense capabilities of AI, integrating it across its product suite.
Shares of this mega-cap stock have rallied 37.7% over the past 52 weeks, outpacing the broader S&P 500 Index’s ($SPX) return of 24.4% over the same time frame.
Alphabet made a significant announcement on April 25, revealing its inaugural quarterly dividend of $0.20 per share, to be distributed to its shareholders on June 17. Also, the tech giant’s board of directors approved a $70 billion share buyback on the same day.
In terms of valuation, the stock trades at 23.18 times forward earnings, which is lower than its own five-year average of 25.65x.
Apart from its debut dividend announcement, on April 25, the company revealed its Q1 earnings results, which exceeded Wall Street expectations. Its revenue jumped 15.4% year over year to $80.5 billion, sailing past estimates by 2.3%. Its EPS of $1.89 rose 61.5% annually, also topping forecasts by a notable 26.9%.
Moreover, the company’s advertising and Cloud segments also showed significant annual improvement, with revenue climbing by 13% and 28.4%, respectively. Alphabet’s solid quarterly performance and inaugural dividend announcement sent its shares soaring 10.2% on April 26.
Analysts tracking Alphabet project the company’s profit to climb 31.2% year over year to $7.61 per share in fiscal 2024 and grow another 13.7% to $8.65 per share in fiscal 2025.
As for the company’s “moat,” Morningstar analyst Michael Hodel pointed out Alphabet's stronghold in the online search arena, commanding a global share of over 90%. The analyst emphasized the company's robust cash flow generation and expressed confidence in Alphabet’s ability to sustain its leadership, anticipating ongoing growth in search. Regarding Alphabet's Q1 earnings, Hodel spotlighted the cloud division's impressive revenue surge, propelled by escalating demand for AI innovations.
Alphabet stock has a consensus “Strong Buy” rating overall. Out of the 44 analysts covering the stock, 35 suggest a “Strong Buy,” three advise a “Moderate Buy,” and the remaining six give a “Hold” rating.
The average analyst price target of $194.89 indicates a potential upside of 12.9% from the current price levels. However, the Street-high price target of $225 suggests a potential upside of nearly 30.4%.
Tech Stock #2: Amazon
Commanding a market cap of $1.9 trillion, Washington-based Amazon.com, Inc. (AMZN) has spread its wings across various industries over the past few years. While best known for its unparalleled retail prowess, Amazon's foray into entertainment with Amazon Prime Video, Amazon Music, Prime Gaming, and Twitch highlights its versatility and impact. Furthermore, the company has made significant strides in the tech realm, particularly with its Amazon Web Services (AWS) segment, capitalizing on the burgeoning demand for cloud and AI services.
Over the past 52 weeks, shares of Amazon have surged nearly 46%, outperforming the broader SPX’s return during the same time.
Priced at 38.62 times forward earnings, the stock trades at a discount to its own five-year average of 183.17x.
On April 30, Amazon reported its Q1 earnings results, which topped Wall Street’s predictions on both the top and bottom lines. Total net sales climbed 12.5% year over year to $143.3 billion, narrowly edging past estimates, while adjusted EPS of $1.13 smashed projections by 36.1%.
During the quarter, Amazon’s tech prowess took center stage, propelled by the stellar performance of its AWS segment, with net sales up 17.3% annually. President and CEO Andy Jassy said, “The combination of companies renewing their infrastructure modernization efforts and the appeal of AWS’s AI capabilities is reaccelerating AWS’s growth rate (now at a $100 billion annual revenue run rate).”
For Q2, management anticipates net sales to range between $144 billion and $149 billion, suggesting an annual growth rate of 7% to 11%. Operating income is projected to be between $10 billion and $14 billion.
Analysts tracking Amazon expect the company’s profit to reach $4.72 per share in fiscal 2024, up 66.2% year over year, and rise another 22.9% to $5.80 per share in fiscal 2025.
Following the company’s Q1 performance, Morningstar analyst Dan Romanoff observed Amazon's continued dominance, particularly in e-commerce and cloud services. The analyst further pointed out that demand across the company's business units remains favorable, with AWS experiencing notable improvement in demand.
Amazon stock has a consensus “Strong Buy” rating overall. Out of the 46 analysts offering recommendations for the stock, 42 suggest a “Strong Buy,” three advise a “Moderate Buy,” and the remaining one gives a “Hold” rating.
The average analyst price target of $220.29 indicates a potential upside of 24.8% from the current price levels. The Street-high price target of $246 suggests that the stock could rally as much as 39.4%.
Tech Stock #3: Meta Platforms
With a market cap of $1.2 trillion, California-based Meta Platforms, Inc. (META) is the world's largest social media titan. Since Facebook's game-changing debut in 2004, Meta has revolutionized how we connect. Plus, through apps like Messenger, Instagram, and WhatsApp, Meta has further amplified its global reach. Having revolutionized the social media landscape, the company is now advancing into immersive experiences with augmented and virtual reality, leading the next evolution in social technology.
Shares of this social media giant have surged almost 77% over the past 52 weeks, easily dwarfing SPX’s gains during the same period.
On May 30, Meta declared its second-ever quarterly dividend of $0.50 per share, payable to its shareholders on June 26. The company’s annualized dividend of $2.00 translates to a 0.42% dividend yield.
In terms of valuation, the stock is trading at 23.78 times forward earnings, in line with its own five-year average.
Meta reported stronger-than-expected Q1 earnings results on April 24. The company’s revenue of $36.5 billion rose 27.3% year over year, marginally beating forecasts. Its EPS of $4.71 jumped a notable 114.1% annually, topping projections by almost 9%. As of March 31, the company held approximately $58.12 billion in liquid assets, while free cash flow surged to $12.5 billion.
Commenting on the company’s Q1 performance, founder and CEO Mark Zuckerberg said, "It's been a good start to the year, the new version of Meta AI with Llama 3 is another step towards building the world's leading AI. We're seeing healthy growth across our apps and we continue making steady progress building the metaverse as well."
In Q2, management projects total revenue between $36.5 billion and $39 billion. Looking forward to fiscal 2024, the company expects its capital expenditures to be between $35 billion and $40 billion, up from the previous estimate range of $30 billion and $37 billion, reflecting accelerated infrastructure investments to support its AI roadmap. Plus, the company expects capital expenditures to increase next year due to aggressive investments in AI research and product development.
Analysts tracking Meta project the company’s profit to increase 35.8% year over year to $20.19 per share in fiscal 2024 and grow another 14.7% to $23.15 per share in fiscal 2025.
As for Meta’s competitive advantage, Morningstar analyst Hodel noted that the company has boosted user engagement by adding new features and apps to its ecosystem. With the surge in interactions among friends and family, as well as the sharing of videos and pictures, Meta will steadily compile more data. This valuable data can then be leveraged by Meta and its advertising clients to precisely target users with tailored ad campaigns.
Meta stock has a consensus “Strong Buy” rating overall. Out of the 46 analysts covering the stock, 40 suggest a “Strong Buy,” one advises a “Moderate Buy,” three recommend a “Hold,” and the remaining two give a “Strong Sell” rating.
The average analyst price target of $520.05 indicates a potential upside of 11.34% from the current price levels. However, the Street-high price target of $600 suggests the stock could rally as much as 28.4%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
