The current investor sentiment around tech stocks is a polarizing one. Investors have a lot to consider with the upcoming election upon us. They also need to factor in the general performance of tech stocks this year, and consider how they might see these stocks perform moving forward.
Factors fueling worry here include a general sentiment that Democrat leaders are likely to impose stricter laws on large tech companies. Upcoming regulatory woes along with the sentiment that tech stocks are due for a correction characterize the narrative to rotate out of tech.
There was already strong sentiment from the left that these companies have been too dominant in the U.S. economy, and are anti-democratic. Recent news the form of a 449 page Congressional report adds fuel to that fire. Pundits expect that democrats will use the findings therein to bring forth bills against the large tech companies. InvestorPlace - Stock Market News, Stock Advice & Trading Tips
One question to consider is the timeline of potential regulation. That is, if large-cap tech stocks find themselves under new regulations, when will that occur? Any bills will likely be introduced after the new year and into 2021 if Biden is elected. When such bills would be enacted is a harder question to answer. This answer from a former U.S. Congress employee suggests an average of 263 days, and a mean of 215 days. So, any new regulations would likely become law by mid-to-late 2021.
Tech giants aside, it’s also important to answer the question of which tech sectors should fare well in an economic recovery. A recovery looks likely to gain momentum on news that a vaccine will be available to all Americans by sometime mid-2021.
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Yes, tech stocks have driven the markets through this year. So, investors should at least question whether they are overweight. Yet, investors must also consider why so much capital has flowed into tech stocks in the first place.
Jack Ablin, Chief Investment Officer at Cresset Wealth Advisors remains pro-big tech. His bull thesis: “People have to keep in mind that the five largest tech companies make more in earnings than the entire Russell 2000 combined, so this isn’t the internet bubble.”
Michael Farr, president of Farr, Miller & Washington LLC contends that fundamentals are driving capital into big tech, and a divestment due to current headwinds would be “a sucker’s trade.”
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With all of that in mind, here are 10 tech stocks to buy for 2021:
Google (NASDAQ:GOOG, NASDAQ:GOOGL)
Advanced Micro Devices (NASDAQ:AMD)
Taiwan Semiconductor (NYSE:TSM)
A brief look at this list reveals my thesis: big tech will remain strong in 2021 and semiconductors will too.
Tech Stocks to Buy: Google (GOOG,GOOGL)
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Google isn’t going anywhere anytime soon. Before looking at the fundamental financial reasons that it should continue to appreciate, let’s consider a negative scenario: Regulatory scrutiny ramps up following the election targeting the big four tech companies.
Firstly, the timeline means that any potential legislation would be enacted after drawn out court battles. Not only does Google have the resources to fight in court, but it continues to lobby currently. The truth is that all of the big tech players are cozying up to the Democrats and Biden. In fact, Google, along with Amazon and Microsoft, is among the top five contributors to Biden’s campaign.
This is why investors should ultimately have little to fear regarding headlines implying a big tech breakup. Regardless of which party is in power. And that’s why I remain bullish on all of them.
Google remains central to the internet, information dissemination and of course advertising. The company is an earnings machine, and that doesn’t look to be in any jeopardy. Q3 earnings estimates are expected to have risen by 11.15% when it reports earnings on Oct. 29. On an annual basis EBITDA has risen each year from 2016 to 2019 from $29 billion to over 47 billion.
The point here is simple: outside of election headlines and antitrust rhetoric, there’s little to substantiate the idea that Google has tangible trouble. None of this mentions any of the other holdings in the Alphabet portfolio. YouTube is a cash cow, and the company has plenty of future facing potential in Waymo among others. Not only should 2021 be bright, but so too should the longer term.
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Microsoft should continue to grow in 2021 if past is prologue. In each of the first halves of the previous 3 years Microsoft has grown net income from $16.57 billion in 2018, to 39.24 billion in 2019, to $44.28 billion in 2020.
Investors should consider some trends that will factor into Microsoft’s 2021 performance as well. A few highlighted areas for investors to focus on directly from Microsoft’s Q2 earnings report include (page 35):
Commercial cloud revenue increased 36% to $51.7 billion.
Office 365 Commercial growth of 24%.
LinkedIn revenue increased 20%.
Server products and cloud services revenue increased 27%, driven by Azure growth of 56%.
Azure and the cloud are going to continue to become increasingly important through next year and into the future. Microsoft has shown that it can sell these products and looks to be leading there. The company continues to sell Office 365 products very well. And Microsoft is beginning to see returns from its acquisition of LinkedIn. Any readers who have been on the platform for several years will note how rapid the transition has been. It feels much more geared toward commercial purposes now than in the past. This is evidenced by the revenue jump.
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Azure and cloud offers look to be particularly important to the future of the company as we’ve witnessed a shift and an acceleration toward cloud utilization in the pandemic.
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Intel is still Intel despite the headline ink that other chip makers have garnered in 2020. Earlier this year, the company announced that it was going to delay the release of its 7-nanometer chips. Initially the new chipsets were intended to be released late 2021. They were then pushed back to late 2022, or early 2023. The fear is that this opens the door for other competitors to swoop in leading to a weaker 2021.
Intel has overcome nearly this exact problem in the past. The company underwent delays in the release of its 10nm chips but still fared well financially. Intel should have little trouble weathering this delay. Intel’s new Tiger Lake chips compute quicker, using less energy. Demand has been strong with the chips slated to be included in the design of over 150 computers. And the company claims that the Tiger Lake chips are “24% faster than AMD’s Ryzen laptop chip.”
Intel is claiming that these chips are significantly faster than rival chips in several measures and a leap over the Ice Lake chips they replace. With all of these factors in mind, INTC stock is a buy for 2021. As the legacy player, it should have few problems. It should be strong, and while rivals have shown their prowess, Intel is going nowhere.
Advanced Micro Devices (AMD)
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AMD stock has done great in 2020. Shares have appreciated roughly 69% year-to-date and about 170% over 12 months.
Recent news, which could pay dividends soon, includes its deal to buy Xilinx (NASDAQ:XLNX). The deal has not yet been finalized, but is in late stage talks. Although both companies are chip makers, they operate in disparate portions of the market. However, both have focused on data centers of late.
Thus, the strategy is likely to beef up that effort among other things. Analyst Matthew Ramsay of Cowen notes that the deal looks appealing from the perspective that it could increase AMD’s earnings 10%-20% by 2023. Yet, he also notes that bottom line concerns are not the end-all, be-all, especially given the trade war’s effect on the semiconductor industry.
AMD stock is not without concerns. Specifically in terms of valuation there are some questions. AMD stock comes with a trailing price-to-earnings ratio of 152x, which is in the lowest tenth of all semiconductor manufacturers.
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Therefore, it wouldn’t be surprising to see some selling to book profits or a temporary reversal in market sentiment. Nevertheless, 2021 looks bright.
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Facebook is coming off of a September that saw its prices decline by about $40 per share. The company is a huge part of the election conversation and its policies make it a point of conversation, if not derision, and scrutiny. However, I believe Facebook will still be a top tech stock to buy for 2021 regardless of the outcome of the election.
The company is always in the headlines and will continue to be due to its sheer size and influence. And I believe that calls for the breakup of Facebook are exaggerated and will bear no fruit. After all, Zuckerberg has been in front of Congress and the only thing that has slowed FB stock recently has been the novel coronavirus pandemic.
Facebook ad spending is likely to increase through the end of the year. We’ll have a vaccine sometime in 2021 and there is going to be an economic recovery. That’s going to mean more companies looking to spend money on Facebook ads to sell their products.
The company has also been making inroads into its e-commerce Shops service. Just how successful this venture will become, no one knows. However, this has long been a concern and something which the company has lacked. Facebook and Instagram users will now be able to engage in social commerce via Facebook. This should be a boon to the company.
Instagram Reels also bodes well for the company. Now users can upload video to the platform which should increase engagement and expand the platform’s offerings.
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It’s easy to see why analysts are so positive on AMZN stock. The company has performed incredibly well throughout the pandemic. Over a longer term like 10 years, the gains have been phenomenal. Q2 earnings were $10.30 per share following what was supposed to have been $1.48 on consensus. That’s a part of the reason that 42 analysts have it a buy, while only 2 think it’s a hold, and 1 brave contrarian calls it a sell.
Overall, basically everything gets better and better for Amazon along broad lines. Sales growth has risen by about 30% in each of the past 5 years and beyond. Through Q2 North American sales have risen, international sales have risen and AWS sales have risen.
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And recall that Amazon is among the top contributors to Biden’s campaign. Not that it really matters. If Trump prevails in November this company is still going to be the king of commerce. And it’s hard to imagine that Democrats would be willing to breakup Amazon even if they could. Amazon is one of America’s greatest success stories. Damaging that wouldn’t exactly be a great way to start off a new presidency.
Taiwan Semiconductor (TSM)
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Taiwan Semiconductor has a lot of tailwinds which should propel it into the next year and beyond. On its own merits, it is strong. Those merits combined with its strategic alignment, make it very strong. The company operates foundries across Taiwan, a few in China, and a few in the U.S. Foundries themselves are the fabrication centers from which chips emerge. They’re also incredibly expensive to build, often costing into the billions.
TSMC is the largest pure play semiconductor foundry, but lags behind Samsung in production volumes. Samsung is a deeply diversified company with businesses spanning industry.
TSMC manufactures chips for over 500 other companies. Among them, Apple, Huawei, Sony (NYSE:SNE), Qualcomm (NASDAQ:QCOM) and Broadcom (NASDAQ:AVGO). These chips are going to be integral to the trends leading the future including AI, VR and most advances in computing. TSMC is a Taiwanese company and is central to the trade wars. All semiconductor manufacturers are subject to this tension, perhaps none more so than TSMC.
The company will build a foundry in Arizona that will produce 5 nm chips in late 2023 at the earliest.
This deal signals political allegiance with the U.S. in the trade wars and in opposition to Chinese ascendancy in general. However, it is a small development on the basis of overall foundry footprint for the company. The Arizona move likely has a lot to do with the next tech stock to buy for 2021.
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There are few signs that Apple shows any slowing down going into 2021. This is another company that just seems to be forever winning. The company’s latest big news relates to semiconductors, which is not something it was previously known for. However, it is something which has long been a source of speculation around the company.
The company is now producing its own MacBooks powered by its own chips, and not Intel’s. The shift away from Intel is not news and the rumors of a breakup between the two have persisted for the past 5 years.
The company will unveil its Apple Silicon powered MacBook on Nov. 17. This release could rank up there with other company hallmarks as it portends profound change in the semiconductor landscape. Of course, the new MacBook is interesting in and of itself and may well bring in large revenues for the company.
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But this marks a potential change in the semiconductor landscape. Investors now need to consider Apple in a very different light. Yes it still makes iPhone, MacBooks and all of the other things it’s known for. But now the company is signaling its intent to play in this sphere.
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Year-to-date CRM stock is up roughly 55%. And from the pandemic trough, it’s up over 100%. These are great signs for investors, yet it also poses a question: Is there growth left? I think so. The company’s presence in cloud through it’s cloud-based enterprise software is strong.
CRM stock has grown and grown over the past decade. Analysts favor it as a buy over a hold 33 to 4. Price targets go well over $300, meaning lots of upside from current prices.
The pandemic put several trends on steroids. They grew. Work from home won’t displace the office, but there will be more and more of it. Salesforce helps companies manage relationships, which is only going to make it more valuable.
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Nvidia is another chip maker on this list. That’s because chip makers aren’t going anywhere. NVDA stock may have arguable issues with some of its metrics, but it still is likely to appreciate in price.
In 2020, the firm will derive most of its revenue from gaming and a significant portion from data centers. The company sees its growth being driven by gaming, AI, AR/VR and autonomous vehicles. Growth rates have been strong across those four areas. The 3-year CAGR across gaming, AI, AR/VR and autonomous vehicles has been 11%, 53%, 13% and 13%, respectively.
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The company is also building the world’s fastest supercomputer in Italy. Analysts are bullish on NVDA stock, and it should be strong into next year.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.”
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