The Fed’s aggressive methods to curb persistent inflation have resulted in a massive tech sell-off. The onslaught of rising interest rates has induced investors to dump tech stocks this year, evident from the tech-heavy Nasdaq Composite’s decline of more than 30% year-to-date.
However, the development and adoption of new technologies are boosting the prospects of the tech sector. The global digital transformation market is expected to grow at a CAGR of 21.1% to reach $1.55 trillion by 2027.
Moreover, the growing demand for gadgets is also expected to keep the tech industry in demand. According to Statista, the number of mobile devices is expected to reach 18.22 billion by 2025, representing an increase of 4.20 billion compared to 2020 levels.
Given this backdrop, fundamentally strong tech stocks Microsoft Corporation (MSFT), Gartner, Inc. (IT), GoDaddy Inc. (GDDY), and Extreme Networks, Inc. (EXTR), which look poised to deliver solid returns, could be ideal buys now.
Microsoft Corporation (MSFT)
Tech giant MSFT operates as a pioneer in the software field. The company operates in three segments: Productivity and Business Processes; More Personal Computing; and Intelligent Cloud.
MSFT and Cisco Systems, Inc. (CSCO) have recently reported their plans to add MSFT’s Teams messaging app to its meeting devices natively on CSCO Room and Desk devices. The Teams Room software is expected to be available on CSCO devices soon.
In September, MSFT declared a quarterly dividend of $0.68 per share, reflecting a six-cent or 10% increase over the previous quarter’s dividend. This is payable to shareholders on December 8 and demonstrates the company’s strong cash generation ability.
For the fiscal fourth quarter that ended June 30, MSFT’s EPS increased 2.8% from its year-ago value to $2.23. Its total revenue increased 12.4% year-over-year to $51.87 billion. Operating income grew 7.5% from the prior-year period to $20.53 billion, while net income improved 1.7% year-over-year to $16.74 billion.
The consensus EPS estimate of $2.31 for the quarter that ended September 2022 indicates a 1.8% improvement year-over-year. Revenue is expected to rise 9.9% year-over-year to $49.79 billion for the same quarter. In addition, MSFT topped consensus EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 5.7% over the past five days and marginally intraday to close its last trading session at $238.50.
MSFT’s POWR Ratings reflect a promising outlook. The company has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MSFT is also rated a B in Stability and Quality. Within the Software - Business industry, it is ranked #10 of 52 stocks.
Click here for the additional POWR Ratings for Growth, Momentum, Sentiment, and Value for MSFT.
Gartner, Inc. (IT)
IT operates as a global research and advisory company. The firm operates through its three broad segments: Research; Conferences; and Consulting.
During the fiscal second quarter that ended June 30, IT’s non-GAAP adjusted net Income increased 19.1% year-over-year to $231 million. The company’s non-GAAP EPS grew 27.2% year-over-year to $2.85. Total revenues increased 17.9% from the prior-year period to $1.38 billion.
The consensus revenue estimate of $1.30 billion for the third quarter (ended September 2022) indicates a 12.2% year-over-year increase. Analysts expect IT’s EPS and revenue to increase 1.3% and 7.2% year-over-year to $9.24 and $5.77 billion for the fiscal year 2023. IT has an impressive surprise earnings history, as it has topped consensus EPS estimates in all four trailing quarters.
Gene Hall, IT’s Chief Executive Officer, said, “We are again raising our guidance and remain well-positioned to deliver long-term, sustained double-digit growth. And we continue to buy back stock, which will increase our per share results this year and beyond.” As of August 2, the company updated its 2022 guidance to total revenue and adjusted EPS of at least $ 5.35 billion and $8.85, respectively.
The stock has gained 21.5% over the past three months to close its last trading session at $290.05.
IT’s POWR Ratings reflect a positive outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
IT is also rated an A in Quality and a B in Sentiment. Within the A-rated Outsourcing - Tech Services industry, it is ranked #3 out of 10 stocks.
To see additional POWR Ratings for Value, Stability, Growth, and Momentum for IT, click here.
GoDaddy Inc. (GDDY)
GDDY engages in the design and development of cloud-based technology products. The company provides a domain name registration product that engages customers at the initial stage of establishing a digital identity.
On September 28, GDDY announced that its Venture Forward research initiative had launched the Microbusiness Data Hub, which provides unprecedented free access to information on more than 20 million micro businesses. This new offering might benefit the company.
GDDY’s total revenue for the fiscal second quarter that ended June 2022 grew 9% year-over-year to $1.02 billion. Net income grew 93% year-over-year to $90.50 million. Its operating income grew by 41.6% from the previous-year quarter to $124.60 million. Its normalized EBITDA (NEBITDA) grew 30.3% from its year-ago value to $258.40 million.
For the third quarter that ended September 30, the company has targeted a total revenue in the range of $1.03 billion to $1.05 billion, representing an 8% year-over-year growth at the midpoint.
For the fiscal year ending December 2022, analysts expect GDDY’s revenue to be $4.11 billion, indicating a 7.8% year-over-year growth. Street expects EPS to increase 5.1% from the prior year to $3.09.
The stock has gained 10% over the past year and 7.7% over the past three months to close its last trading session at $75.99.
GDDY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which translates to Buy in our proprietary rating system. GDDY is also rated a B for Sentiment. In the Software - Business industry, it is ranked #7.
In addition to the above, to see the POWR Ratings for Growth, Momentum, Quality, Stability, and Value for GDDY, click here.
Extreme Networks, Inc. (EXTR)
EXTR is a software-driven networking solutions company that designs, develops, and manufactures wired and wireless network infrastructure equipment and software for network management.
On October 6, EXTR announced that it had selected Verizon Business, a Verizon Communications Inc. (VZ) division, to deploy wireless connectivity service at Liverpool FC’s Anfield Stadium to enhance the in-stadium experience. The deployment, expected to begin later this year, should benefit the company.
In August, EXTR introduced the Extreme AP5050, an outdoor Wi-Fi 6E outdoor access point (AP) optimized for deployment across outdoor venues. This should bolster the company’s revenue stream.
For the fiscal quarter that ended June 30, EXTR’s total net revenues increased marginally year-over-year to $278.20 million. Its total free cash flow improved by 14.6% from the same period last year to $59.82 million.
The company expects a non-GAAP net income between $19.90 million-$26.50 million and a non-GAAP net income per share between $0.15-$0.20 for the fiscal first quarter of 2023.
For the fiscal quarter ending December 2022, analysts expect EXTR’s revenue to be $300.95 million, indicating a 7.1% year-over-year growth. EPS for the same period is expected to increase 10.9% from the previous-year period to $0.23. In addition, EXTR has topped consensus EPS estimates in all four trailing quarters.
The stock has gained 38.6% over the past three months and 10% over the past month to close its last trading session at $14.40.
EXTR’s POWR Ratings reflect a promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. EXTR is also rated an A for Quality and a B for Value and Growth. In the Technology - Communication/Networking industry, it is ranked #2 out of 50 stocks.
In addition to the above POWR Ratings, click here to see the additional ratings for Sentiment, Momentum, and Stability for EXTR.
MSFT shares were trading at $236.48 per share on Wednesday afternoon, down $2.02 (-0.85%). Year-to-date, MSFT has declined -29.23%, versus a -21.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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