published 7 February 2023
The best tech stocks were hard to find in 2022. Many tech companies entered the year trading at lofty valuations, only to encounter stiff macro headwinds as the year progressed.
These headwinds included a Fed intent on aggressively raising interest rates to bring down stubbornly high inflation. There was also a near shutdown of the initial public offering (IPO) market, as well as a spate of awful layoffs. All of this led to significant share-price declines across the technology sector, including for many of Wall Street’s best tech stocks.
But in 2023, the sector appears poised to get back on track. The start of the year has already seen a nice bull move with tech stocks.
More importantly, there are various secular megatrends that should power strong returns. These include cloud computing, artificial intelligence (AI), robotics, mobile and IoT (Internet-of-Things), just to name a few.
Another advantage for tech stocks this year is that the valuations are much better. There has also been more of a focus on generating profits – which is certainly a good sign.
With this in mind, here are the nine of the best tech stocks to buy now. This list includes a number of equities that are highly beloved by Wall Street analysts, but also a few contrarian picks that the crowd might be underestimating.
Data is as of Feb. 6. Analysts’ consensus ratings are courtesy of S&P Global Market Intelligence. Stocks are listed in reverse order of analysts’ consensus recommendation.
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Kyndryl Market value: $3.0 billionDividend yield: N/AAnalysts’ consensus recommendation: 3.00 (Hold)In November 2021, International Business Machines (IBM (opens in new tab)) spun-off its massive Kyndryl (KD (opens in new tab), $13.21) division. This unit is one of the largest providers of managed IT infrastructure services.
On Nov. 4, 2021 – their first day of trading – shares of Kyndryl closed at $26.38. But, unfortunately, this would be the high-water mark for KD. The stock is now hovering around $13.
However, investors seeking out the best tech stocks should not give up on Kyndryl. First of all, being independent from IBM is a major advantage. This allows the company to take an agnostic approach to the technologies it recommends to customers. This not only means better results – but it also attracts more customers. Kyndryl estimates that the spinoff has expanded its market opportunity from $240 billion to $510 billion.
Kyndryl offers a wide array of mission critical services. These include cloud migration, security/resiliency, network/edge, applications, artificial intelligence and the digital workplace.
While global enterprises want to modernize, this can be expensive, time consuming and risky. There are also barriers like regulations. Because of this, the strategy is often to pursue the hybrid cloud. This is a mixture of private and public platforms, which involves complex systems and integrations.
But this is where Kyndryl excels. Consider the case study of Krungsri, which is a leading financial institution in Thailand. The company wanted to improve its online banking, mobile apps and AI capabilities. It tapped Kyndryl to help it create a hybrid cloud platform – based on Amazon Web Services (AWS) – that was secure and resilient.
It’s true that Kyndryl’s overall business has struggled, but management has been aggressive in transforming the company. The cloud hyperscaler business is tracking for $1 billion in annual revenues. The company has also been reducing its costs and forgoing low-margin business.
Then there has been investments in new systems, such as Kyndryl Bridge. This allows for customization of complex IT environments, which should bolster its hybrid cloud business.
And certainly KD is an outlier on this list of best tech stocks based on its consensus Hold rating. But given its big growth prospects and business investments, it could be a solid contrarian play.
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Cloudflare Market value: $18.6 billionDividend yield: N/AAnalysts’ consensus recommendation: 2.26 (Buy)The internet was not built for the massive workloads of today’s cloud computing systems. That’s why there is strong demand for a company like Cloudflare (NET (opens in new tab), $56.65). Its mission is to “help build a better internet.”
To this end, Cloudflare has created a huge network that spans over 100 countries and more than 275 cities. The capacity is about 172 terabytes per second (TBps).
This allows for fast websites and apps with enterprise-grade security. The network blocks about 70 billion threats per day (opens in new tab), such as large distributed denial of service attacks. Cloudflare also leverages AI to continuously improve the performance.
In the third quarter, Cloudflare posted revenues of $253.9 million, up 47% year-over-year, and the net cash flow from operating activities was $42.7 million. The cash position is $1.6 billion.
But this looks like only the beginning for one of Wall Street’s best tech stocks. On the earnings call, cofounder and CEO Matthew Prince said: “Even as we achieve $1 billion [in annualized revenue], we have penetrated less than 1% of our identified market for products we already have available today. That’s why we’re confident we’re on the path to organically achieve $5 billion in annualized revenue over the next five years.”
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Adobe Market value: $171.8 billionDividend yield: N/AAnalysts’ consensus recommendation: 2.11 (Buy)On Sept. 15, Adobe (ADBE (opens in new tab), $375.23) shocked Wall Street when it announced a mega $20 billion acquisition deal for Figma. This startup, founded in 2012, operates a thriving collaboration system for designers and creators.
But investors were not pleased with the announcement, with shares of Adobe plunging nearly 17% in reaction. The belief was that Adobe overpaid for the asset.
Yet this seems to be an overreaction. The fact is that leading online communities often fetch premium valuations. After all, they are extremely difficult to replicate because of the network effects.
Consider that Figma’s addressable market opportunity is $16.5 billion by 2025. The company is also growing quickly, with an estimated $200 million in new ARR (annual recurring revenue) for 2022 – for a total of $400 million. The gross margins are at a juicy 90% and there are positive operating cash flows.
As for the core business of Adobe, it remains healthy. The company continues to generate growth from its franchises like Photoshop, the PDF system, digital signatures, the Adobe Experience Cloud and so on. In its fiscal fourth quarter, ADBE reported revenues of $4.53 billion, up 10% and GAAP operating income came to $1.51 billion.
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Upwork Market value: $1.8 billionDividend yield: N/AAnalysts’ consensus recommendation: 2.00 (Buy)A rise in freelancing has transformed the global workforce. Technologies like mobile and cloud computing have made services like Uber Technologies (UBER (opens in new tab)) and Lyft (LYFT (opens in new tab)) possible.
COVID-19 has also had a major impact on the way we work. Remote and hybrid working arrangements have become much more pervasive.
Such trends have been beneficial for Upwork (UPWK (opens in new tab), $13.67), which operates a global marketplace for freelancers. Its members have skills that span more than 10,000 categories, such as finance, website development and customer support. Upwork is available across over 180 countries.
The company’s platform makes the management process for freelance work much easier. Upwork has detailed vetting of the contractors, which includes assessments of their skills. There are tools for the contracts, project management and payroll/payments.
In the most recent quarter, UPWK revenues grew 24% year-over-year to $158.6 million and the gross sales value was over $1 billion.
There are catalysts that can continue to boost growth for one of the Street’s best tech stocks. Freelance work is more flexible and can be more cost-effective, which are both attractive in today’s slowing economy. Upwork also has been getting traction with its enterprise business. In the third quarter, revenues for this segment shot up by 41% to $12.5 million.
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Okta Market value: $12.2 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.97 (Buy)Okta (OKTA (opens in new tab), $76.34) was among the red-hot growth stocks of the past few years. The shares would hit a peak of about $300 a share in February 2021.
But as growth stocks have gone out of favor, so has Okta. The stock now trades at about $76, although it is off its 52-week low of $44.
Okta is a pioneer of the cloud-based identity market. This is technology that manages authentications, logins and permissions for users.
Identity technology is an essential part of any organization. It helps support security, but also allows for more productivity.
Unlike competitors such as Microsoft (MSFT (opens in new tab)), Okta is a neutral player in the market. This has been a key for the company’s growth.
The migration to the cloud has been another positive. In 2021, global revenues for cloud-based identity solutions exceeded on-premises solutions. This marks a critical inflection point for the market.
In the third quarter, Okta’s revenues shot up by 37% over the year prior, and free cash flow, or the money left over after a company has met its financial obligations, came to $6 million. The company added 650 new customers for a total of over 17,000, up 22% on a year-over-year basis.
There remains much room for growth. The market opportunity for this top tech stock is at about $80 billion.
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Confluent Market value: $7.1 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.95 (Buy)Traditional databases are good at storing and querying large amounts of information, but they do not work well with real-time streaming data. Yet this capability is becoming a must-have. It allows for compelling mobile apps, more responsive back office systems, and better data-driven decisions.
The real-time streaming market is a new category, whose origins go back to 2008. This is when LinkedIn employees Jay Kreps, Jun Rao and Neha Narkhede created Apache Kafka, an open-source project. It helped deal with the huge amounts of data that needed to be processed.
As Kafka grew quickly, Kreps, Rao and Narkhede would commercialize real-time streaming solutions with the founding of Confluent (CFLT (opens in new tab), $24.64) in 2014. The technology is available to clients of all sizes, from small businesses to Fortune 100 companies.
A use case of the technology is with Wix (WIX (opens in new tab)), which operates a large website development platform. The company started with Kafka, but it could not handle the complex workloads. By implementing Confluent, Wix was able to scale its use of real-time streaming data, reduce costs and mitigate the risks. The result was a 90% return on investment.
No doubt, growth has been robust for Confluent. In its fiscal fourth quarter, revenues jumped 41% year-over-year to $169 million and cloud revenues more than doubled to $68 million.
True, as IT spending comes under pressure, the growth rate will fall. But there remain strong long-term drivers for the company’s technology, which is why CFLT is one of the best tech stocks around. The goal for 2023 (opens in new tab) is to get to breakeven for the operating margin and grow its top line at a 30% annual rate.
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Fortinet Market value: $40.6 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.81 (Buy)Founded in 2000, security provider Fortinet (FTNT (opens in new tab), $51.99) still looks like a plucky startup. In the third quarter, revenues jumped 33% year-over-year to $1.15 billion, and product revenues were 39% to $468.7 million. Cash flow from operations was a hefty $483 million.
It helps that cybersecurity is one of the most important IT priorities. The threat environment seems to get increasingly worse.
As for Fortinet, it has a comprehensive platform. It provides protections across all surface areas, and there are over 35 main products. As budgets get tighter, there has been a move to consolidate on larger platforms – which is good news for FTNT.
In addition to being one of the best tech stocks to buy, Fortinet is also one of the best AI stocks to watch going forward. The company has continued to invest aggressively in cutting-edge technologies like artificial intelligence. This is the role of Fortinet FortiGuard Labs, whose systems analyze over 100 billion events daily for real-time threat intelligence. The AI technology will help to further bolster the company’s powerful competitive advantages.
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Datadog Market value: $24.4 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.73 (Buy)Olivier Pomel and Alexis Lê-Quôc met while working at Wireless Generation, a cloud company. Pomel was in charge of the development team and Alexis was the director of operations. Unfortunately, it proved difficult to get cooperation among the two groups.
This is actually common for many other organizations. There is the inevitable politics and fights among the development and operations departments, which can often lead to failed IT projects.
Around 2010, the industry began to shift toward combining the two departments. Enter DevOps, a married entity created to manage the cultural challenges between development and operations.
Pomel and Lê-Quôc saw this as a huge opportunity. They would go on to cofound Datadog (DDOG (opens in new tab), $76.96). The timing was spot on. As more companies looked to digital transformation, there was a big need for DevOps.
Datadog’s initial focus was on building a real-time data platform. This was key to breaking through the silos. But DDOG would aggressively expand on this. Over the years, the company has added services like network and application monitoring, log management, cloud security, database monitoring and universal service monitoring.
Keep in mind that current macro headwinds have had limited impact so far. In the third quarter, revenues spiked by 61% year-over-year to $436.5 million, and operating cash flow came to $83.6 million. Plus, there is about $1.8 billion in the bank.
A major driver for the growth has been the expanding product line. This has been a lever for upselling current customers. In the third quarter, 80% of its customers used two or more products, up from 77% in Q3 2021. About 40% use four or more products, and 16% use six or more. This speaks volumes to the staying power of one of Wall Street’s best tech stocks.
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ServiceNow Market value: $92.4 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.50 (Strong Buy)ServiceNow’s (NOW (opens in new tab), $455.22) Now platform allows companies to digitize their operations and connect silos. Just some of the use cases include security, customer service, IT management, employee experience, procurement and risk management. The Now platform also leverages AI and process mining to optimize the workflows.
The result is that companies can lower costs and operate with much more efficiency. In light of the macroeconomic headwinds, these benefits are top of mind for CEOs.
NOW’s own technology has certainly been a huge benefit for its own organization. Consider the metric called the Rule of 40. This is where the revenue growth rate and profit margin is at least 40%. At this rate, a cloud company will grow at a sustainable pace.
What’s ServiceNow’s Rule of 40? It’s at an impressive 58.5%.
In its fiscal fourth quarter, the company reported subscription revenues of 22%, or 27.5% when adjusted for constant currency. There are 1,637 customers with more than $1 million in annual contract value, up 22% on a year-over-year basis.
On the company’s most recent earnings call, CEO Bill McDermott said that the IT market is undergoing a “great reprioritization.” This means that firms are cutting back on tools and systems that do not have a clear return on investment.
According to McDermott: “We have the end-to-end platform for digital transformation. That platform is applicable to each industry and every persona within the enterprise. And we are going to expand that across the world.” And this is why NOW is on this list of the best tech stocks to buy.
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