In the current robust market, quality technology stocks can still be found at bargain prices. The Nasdaq Composite, known for its technology focus, is nearing its all-time highs achieved in December. The rise of artificial intelligence (AI) has invigorated growth and interest within the technology industry, supporting a rally that began in early 2023. This enthusiasm has made it increasingly difficult to find high-quality tech stocks available at attractive valuations.
Despite this, it is important to recognize that Wall Street consists of individual stocks rather than being a unified stock market. There is always value to be found somewhere. High-growth sectors within technology, such as AI, cloud computing, semiconductors, and cybersecurity, present excellent opportunities for investors seeking significant returns. Currently, there are three notable technology stocks considered a good buy:
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Alphabet (Google): Alphabet, the search engine giant, is among the few leading tech stocks not trading near their all-time highs. After announcing plans to invest more in AI data centers than analysts anticipated, the company’s stock, part of the "Magnificent Seven," has declined since its fourth-quarter earnings release. Traditionally, Alphabet has generated substantial cash profits through advertising on Google and YouTube. Though these significant AI investments affect cash flow without immediate returns, the management stated in the Q4 2024 earnings call that these investments cater to cloud demand exceeding Alphabet’s current capacity. Despite these investments, Alphabet maintains strong financials, generating over $72 billion in free cash flow in 2024 and holding $95 billion in cash with less than $11 billion in debt. Alphabet’s core advertising business grew by over 10% in 2024, ensuring the company can support these long-term growth investments. Analysts expect Alphabet’s earnings to grow by over 16% annually in the long term, with a price-to-earnings ratio of just 23 and a PEG ratio of 1.4, one of the best values among the Magnificent Seven today.
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SentinelOne: SentinelOne, a next-generation cybersecurity company, seems undervalued by Wall Street, with a price-to-sales ratio significantly lower than peers like CrowdStrike, Palo Alto Networks, and Zscaler. While SentinelOne is not yet profitable, it consistently matches its competitors in revenue growth and is improving its operating margin, with ample cash to balance profitability and growth investments. The company’s AI-powered security technology is a notable performer in the competitive security market, consistently receiving industry endorsements. SentinelOne has expanded beyond endpoint security, introducing products like Singularity Data Lake for data security and Purple AI to assist users. The stock’s lower valuation allows shareholders to capture more organic growth and potentially benefit from improved sentiment toward the stock, offering market-beating long-term returns. Though not as large or profitable as its peers now, SentinelOne’s efforts in a sizable and fragmented security market could yield substantial returns for patient investors.
- Taiwan Semiconductor Manufacturing: Semiconductors are critical in the AI boom, powering data centers essential for AI operations. While numerous companies design and sell AI chips, Taiwan Semiconductor Manufacturing produces the majority as the world’s leading foundry. It manufactured about 64% of global chips in Q3 2024, making it a preferred foundry for cutting-edge AI chips. However, its location in Taiwan, amidst a longstanding geopolitical conflict with China, poses a challenge that has restrained the stock’s performance. Despite this, the business, expected to grow earnings by 33% annually, trades at 29 times earnings, resulting in a PEG ratio under 1. To mitigate geopolitical risks, Taiwan Semiconductor is expanding by establishing foundries in other countries, including the United States. Though geopolitical risks remain, the company’s industry dominance and critical role in AI make it an attractive option at its current valuation.
Suzanne Frey, an executive at Alphabet, also serves on The Motley Fool’s board of directors. Justin Pope holds no positions in the mentioned stocks. The Motley Fool has positions in and recommends Alphabet, CrowdStrike, Taiwan Semiconductor Manufacturing, and Zscaler, and it recommends Palo Alto Networks. The Motley Fool has a disclosure policy in place.
