Silicon Valley companies have been at the center of the Wall Street rebound from the March 23 stock market low. The reason for that is twofold. First, the heavy weighting of the FAANG stocks in the major indices, and second, the stellar performance of technology stocks generally, driven by their insulation from the virus and a secular shift of investor capital into the sector.
For new investors, FAANG is an acronym that refers to the five most popular and best-performing Big Tech companies: Facebook (ticker: FB), Amazon.com ( AMZN), Apple ( AAPL), Netflix ( NFLX) and Alphabet ( GOOG, GOOGL).
Thankfully, there are technology stocks outside of the tried-and-true FAANG names that also look appealing, both for the month ahead and for long-term investors. Here are five of the best tech stocks to buy for October:
-- Adobe (ADBE)
-- PayPal Holdings (PYPL)
-- DocuSign (DOCU)
-- Microsoft Corp. (MSFT)
-- Spotify Technology (SPOT)
Adobe is almost like the Microsoft of digital creative tools, offering a suite of highly useful software for marketers, artists, publishers and other modern-day creatives. From Photoshop and Illustrator to Adobe Premiere and InDesign, ADBE makes a handful of top-tier tools that users can access through individual subscriptions or bundle into an all-access package known as Adobe's Creative Cloud, which runs at $52.99 per month for individuals.
This is both a highly compelling deal (for users) and high-margin business (for Adobe), as evidenced by 14% year-over-year revenue growth and staggering gross margins of around 86% last quarter. Due to economies of scale afforded by its asset-light, recurring revenue model, earnings per share (EPS) should continue growing faster than sales, a phenomenon that was seen last quarter when adjusted EPS rose 25% compared with the same period last year.
PayPal Holdings (PYPL)
Is it any surprise that a business spearheaded by Elon Musk, Peter Thiel and LinkedIn co-founder Reid Hoffman has grown to become a powerhouse? PayPal is one of the best tech stocks to buy for October and beyond for a number of reasons, including its longevity, established user base, adaptability and growing relevance to the payment ecosystem of the 2020s.
With so much of the world working and transacting remotely, and an aversion to cash in physical transactions contributing to a nationwide coin shortage, PayPal experienced a record-setting second quarter, with its total payment volume growing 29% year on year to $222 billion. Last quarter also brought record net new active accounts of 21.3 million, bringing its total to 346 million active customer accounts. PYPL also saw free cash flow jump by 112% and adjusted earnings rise 49% from 86 cents during the same time last year.
Although not cheap by traditional metrics, PayPal -- with a forward price-earnings of 41 and all -- is one of the best tech stocks to buy for October and beyond, with analysts expecting EPS to grow by more than 23% annually for the next five years.
It's not hyperbole to say that services like DocuSign may be the biggest shift in the way contracts are produced and signed since Gutenberg's invention of the printing press in the 1400s. DocuSign is the leader in cloud-based, e-signature solutions for businesses and individuals looking to prepare and ratify contracts. DOCU allows for lease agreements, mortgage applications and other legal documents to be signed and executed remotely -- a desperately needed service in the age of remote work and social distancing.
DOCU is only now becoming consistently profitable, and as another cloud-based subscription service, investors can expect DocuSign's profits to grow indefinitely. For the next five years, analysts expect EPS to grow by more than 31% annually -- a rate that is seldom seen in large-cap stocks of any sort.
Microsoft Corp. (MSFT)
Although not one of the FAANG stocks, Microsoft perhaps deserves mention in a new catchy acronym, if not due to its staying power then due to its size and consistent growth alone. A Wall Street star in the 1990s, MSFT has once again regained its status as a star, with a valuation of more than $1.5 billion second only to Apple among the most valuable U.S. companies.
Unlike the previously mentioned best tech stocks to buy for October, Microsoft trades at far more reasonable multiples, with a price-earnings ratio of 35 and a forward price-earnings ratio of 27. A company worth more than $1.5 trillion rarely exists in the first place, but it's even rarer that such a company is expected to grow earnings by 15% or more for the next five years while paying a growing and sustainable dividend.
Microsoft's cloud computing behemoth, Azure, which is the closest competitor to Amazon Web Services, grew by 47% last quarter.
Spotify Technology (SPOT)
The last of the best tech stocks to buy for October is Spotify, the music-streaming giant and the only company of the five picks to be consistently unprofitable. Although it's often best to buy tech stocks that already have broken into the black, there are exceptions to the rule, and Spotify might just be one.
The company recently signed the single hottest podcaster in the marketplace, Joe Rogan, to an exclusive contract. Not only should that see Spotify seize some market share from Alphabet's YouTube, but SPOT has developed video capabilities for its platform that should augment Rogan's program and be rolled out for future contributors.
Last quarter, monthly active users rose 29% to 299 million, including a 27% increase in premium subscribers. As the top music-streaming platform in the U.S., it's only a matter of time before SPOT breaks even and gets acquired or develops into a proven, self-sustainable tech stock to own for years down the line.