Technology stocks have stumbled in 2022, after years of strength, amid raging inflation and soaring interest rates.
The S&P 500 information and technology sector lost 20% year to date through June 8, the worst showing for that period in 20 years, The Wall Street Journal reports. The disparity in performance with the S&P 500 – negative six percentage points – is the biggest in 18 years.
Given those declines, is now a good time to jump into tech stocks? Morningstar sees several of the megacap names as vastly undervalued.
Amazon
Morningstar analyst Dan Romanoff puts fair value for the company’s stock at $192, 60% above its recent quote of $120.
“Amazon (AMZN) dominates its served markets, notably e-commerce and cloud services,” he wrote in a commentary.
“It benefits from numerous competitive advantages and has emerged as the clear e-commerce leader thanks to its size and scale, which yield an unmatched selection of low-priced goods for consumers.”
As for the company’s Prime service, it “ties Amazon’s e-commerce efforts together and provides a steady stream of high-margin recurring revenue from customers who purchase more frequently from Amazon’s properties,” Romanoff said.
Also, “through Amazon Web Services, Amazon is also a clear leader in public cloud services,” he said.
And “the firm’s advertising business is already large and continues to scale, offering an attractive option for marketers looking to access a vast audience with a variety of proprietary data points about those very consumers,” Romanoff said.
Microsoft
Romanoff puts fair value for the company’s stock at $352, 29% above its recent quote of $272.
Microsoft (MSFT) reported “solid results” in its most recent quarter, despite headwinds such as a strong dollar, he said.
“We think digital transformation projects continue to fuel overall demand and we are also encouraged by strength in Azure [Microsoft’s cloud service], which saw tier-one workloads moving to the cloud in the form of larger and longer-term deals than ever before.”
Further, “Microsoft remains impressive in its ability to drive both growth and margins at scale, and we think there is more to come on both fronts,” Romanoff said.
“We see results as reinforcing our thesis centering on the proliferation of hybrid cloud environments and Azure, as the firm continues to use its on-premises dominance to allow clients to move to the cloud at their own pace.”
Alphabet
Morningstar analyst Ali Mogharabi puts fair value for the stock at $3,600, 52% above its recent quote of $2,362.
“Alphabet (GOOGL) dominates the online search market, with Google’s global share above 80%, via which it generates strong revenue growth and cash flow,” he wrote in a commentary.
“We expect continuing growth in the firm’s cash flow, as we remain confident that Google will maintain its leadership in the search market.”
Further, “we foresee YouTube contributing more to the firm’s top and bottom lines, and we view investments of some of that cash in moonshots as attractive,” Mogharabi said. “Whether they will generate positive returns remains to be seen, but they do present significant upside.”
He thinks online ad revenue will continue to grow at double-digit rates for the next five years, as Alphabet makes the sale and purchase of ads more efficient for publishers and advertisers.
