The tech industry is at the forefront of innovation, making them attractive growth picks for investors. Investors’ interest in tech stocks is evident from the tech-heavy Nasdaq Composite's 28.8% returns year-to-date. Although the high-interest rate environment makes tech stocks unattractive to investors, the industry’s long-term growth prospects look solid.
Given this backdrop, it could be wise to buy quality tech stocks Pinterest, Inc. (PINS), Alphabet Inc. (GOOGL), and Meta Platforms, Inc. (META), which are rated A (Strong Buy) or B (Buy) in our proprietary POWR Ratings system.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the tech industry looks well-positioned for growth.
Tech has become pivotal, almost nondiscretionary, in the success of any organization. Innovations and disruptions play a crucial part in the tech sector's growth. The growth prospects of tech companies are one of the key reasons why tech stocks attract investors.
The worldwide IT spending is projected to increase 3.5% year-over-year to $4.69 trillion in 2023. IT spending is expected to grow by 8% over the prior year to $5.07 trillion in 2024. Tech companies have grabbed investors’ attention as they have facilitated various enterprises' digital transformation journeys. Enterprises have been.
In addition to transitioning to cloud-based solutions, enterprises have been integrating cutting-edge technologies such as artificial intelligence (AI), machine learning (ML), virtual reality (VR), and augmented reality (AR) to enhance their operations. Moreover, with the advent of generative AI, the tech industry is set to witness a substantial increase in IT spending.
Gartner’s John-David Lovelock said, “In 2023 and 2024, very little IT spending will be tied to GenAI. However, organizations are continuing to invest in AI and automation to increase operational efficiency and bridge IT talent gaps.”
“The hype around GenAI is supporting this trend, as CIOs recognize that today’s AI projects will be instrumental in developing an AI strategy and story before GenAI becomes part of their IT budgets starting in 2025,” he added. The total addressable market for generative AI is projected to reach $150 billion.
Considering these conducive industry trends, let’s evaluate the three Internet picks, beginning with the third choice.
Stock #3: Pinterest, Inc. (PINS)
PINS operates as a visual discovery engine. The company’s engine allows people to find ideas, such as recipes, home and style inspiration, and others; provides video, product, and idea pins; and offers organizing and planning tools. It shows organic recommendations and an advertising engine based on pinners' tastes and preferences; it enables pinners with shoppable product pins, including price, color, and size, that redirect to retailer websites.
PINS’ 76.53% trailing-12-month gross profit margin is 57.4% higher than the 48.63% industry average. Likewise, its 11.75% trailing-12-month levered FCF margin is 53.8% higher than the 7.64% industry average. Furthermore, the stock’s 0.84x trailing-12-month asset turnover ratio is 74.7% higher than the 0.48x industry average.
PINS’ revenue for the third quarter ended September 30, 2023, increased 11.5% year-over-year to $763.20 million. Its non-GAAP net income rose 152.7% over the prior-year quarter to $193.34 million. The company’s adjusted EBITDA increased 138.9% year-over-year to $184.67 million. In addition, its non-GAAP EPS came in at $0.28, representing an increase of 154.5% year-over-year.
Analysts expect PINS’ EPS and revenue for the quarter ending December 31, 2023, to increase 76.9% and 12.4% year-over-year to $0.51 and $985.86 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 48% to close the last trading session at $30.94.
PINS’ POWR Ratings reflect its solid prospects. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #11 out of 58 stocks in the Internet industry. It has an A grade for Growth and Quality and a B for Sentiment. Click here to see the other ratings of PINS for Value, Momentum, and Stability.
Stock #2: Alphabet Inc. (GOOGL)
GOOGL offers various products and platforms internationally. It operates through Google Services, Google Cloud, and Other Bets segments. The Google Services segment provides products and services, including ads, Android, Chrome, hardware, Gmail, Google Drive, Google Maps, etc. The Google Cloud segment offers infrastructure, cybersecurity, data, etc. The Other Bets segment sells health technology and internet services.
GOOGL’s 22.46% trailing-12-month net income margin is 551% higher than the 3.45% industry average. Likewise, its 27.42% trailing-12-month EBIT margin is 229.5% higher than the 8.32% industry average. Furthermore, the stock’s 32.33% trailing-12-month EBITDA margin is 76.7% higher than the 18.30% industry average.
For the fiscal third quarter ended September 30, 2023, GOOGL’s revenues increased 11% year-over-year to $76.69 billion. Its net cash provided by operating activities rose 31.3% over the prior-year quarter to $30.66 billion. The company’s operating income increased 24.6% year-over-year to $21.34 billion.
Also, its net income rose 41.5% year-over-year to $19.69 billion. In addition, its EPS came in at $1.55, representing an increase of 46.2% year-over-year.
For the quarter ending December 31, 2023, GOOGL’s EPS and revenue are expected to increase 52.3% and 11.9% year-over-year to $1.60 and $85.10 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 54.7% to close the last trading session at $129.10.
GOOGL’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the same industry, it is ranked #3. It has a B grade for Sentiment and Quality. To see the other ratings of GOOGL for Growth, Value, Momentum, and Stability, click here.
Stock #1: Meta Platforms, Inc. (META)
META develops products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and the wearable world. It operates in two segments: Family of Apps and Reality Labs. The Family of Apps segment offers Facebook, Instagram, Messenger, and WhatsApp. The Reality Labs segment provides augmented and virtual reality-related products.
META’s 22.56% trailing-12-month Capex/Sales is 452.1% higher than the 4.09% industry average. Likewise, its 23.19% trailing-12-month levered FCF margin is 190.3% higher than the 7.99% industry average. Furthermore, the stock’s 0.64x trailing-12-month asset turnover ratio is 33.1% higher than the 0.48x industry average.
META’s revenue for the third quarter ended September 30, 2023, increased 23.2% year-over-year to $34.15 billion. Its net cash provided by operating activities rose 110.5% over the prior-year quarter to $20.40 billion. The company’s income from operations increased 142.7% year-over-year to $13.75 billion. Its net income rose 163.5% year-over-year to $11.58 billion. Also, its EPS came in at $4.39, representing an increase of 167.7% year-over-year.
Street expects META’s EPS and revenue for the quarter ending December 31, 2023, to increase 178.8% and 21.1% year-over-year to $4.91 and $38.95 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 253.8% to close the last trading session at $314.60.
META’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #2 in the Internet industry. It has an A grade for Quality and a B for Growth and Sentiment. Click here to see the additional ratings of META for Value, Momentum, and Stability.
What To Do Next?
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GOOGL shares rose $0.10 (+0.08%) in premarket trading Monday. Year-to-date, GOOGL has gained 46.32%, versus a 14.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
Analyzing 3 Highly-Rated Tech Stocks: GOOGL, META and PINS StockNews.com
