Five Technology Stocks to Consider for Purchase Include Microsoft

Five technology stocks to consider for purchase include Microsoft (NASDAQ:MSFT), the giant Redmond, Washington, computer software and systems company that reported reduced growth in its most recent quarterly results and expressed strong interest on Aug. 2 in buying parts of the video-sharing TikTok app from China’s ByteDance.

Microsoft still stands out as one of the world’s top technology companies, but its lofty price-to-earnings (P/E) valuation ratio of 34.8, compared to an estimated NASDAQ P/E of 22.17, will be difficult to maintain without finding new avenues of growth that likely would need to come through acquisitions of businesses such as TikTok. President Trump had voiced concern about the possibility that TikTok’s current Chinese ownership could make the company vulnerable to pressure from its country’s Communist government to share the personal data of American users in the future.

“Microsoft always covets a robust new consumer-facing business it can bolt onto its existing platform and get in the way of its Big Tech rivals,” said Hilary Kramer, host of a national radio program called “Millionaire Maker and head of the Value Authority and GameChangers advisory services. “That’s what makes TikTok interesting for them. As a standalone business, it might at best create a one-time, 10% step up on the revenue growth curve, but think about what integrated video messaging can do for the Xbox or what a commercial version could do for LinkedIn or even Office.

Columnist and author Paul Dykewicz interviews money manager Hilary Kramer, whose premium advisory services included 2-Day Trader, IPO Edge, Turbo Trader, High Octane Trader and Inner Circle.

TikTok May Boost Microsoft as One of Five Technology Stocks to Consider for Purchase

Videoconferencing is now a must-have workplace function that is as essential as a spreadsheet or document creation, Kramer continued. MSFT already owns the Skype video-calling service but TikTok could be the key to a broader collaboration platform that “outclasses everything else,” she added.

Such a deal, if it can be structured to gain approval from the U.S. and Chinese governments, could put Microsoft into the social media business in a deepened way. However, four formidable giant technology stocks now involved in the social media business reported financial results after the close of trading on July 30, with Apple (NASDAQ:AAPL) and Amazon.com Inc. (NASDAQ:AMZN) notching better-than-expected performance, while Facebook (NASDAQ:FB) and Google’s parent company Alphabet Inc. (NASDAQ:GOOG) showed softening growth. 

Nonetheless, the next day the share prices of three of the stocks jumped, as Apple surged 10.47%, Facebook soared 8.17% and Amazon climbed 3.70%, while Alphabet slipped 3.17%. But the previous day, a Congressional committee exploring “unfair” business practices questioned each of the four companies’ chief executives.

TikTok Would Aid Microsoft as One of Five Technology Stocks to Consider for Purchase

The proposed acquisition of TikTok operations in the United States, Canada, Australia and New Zealand should be a positive move for Microsoft, said Bob Carlson, leader of the Retirement Watch advisory service and chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

“It adds a very large group of young users to supplement those Microsoft already has with its game business,” Carlson told me. “Microsoft has an excellent record of successful acquisitions.” 

Ironically, Microsoft used to be the villain among tech companies, Carlson said. Now, the “negative attention” is focused on the other technology titans, he added.

“Microsoft is under the radar and can focus on running its businesses,” Carlson continued.

Another plus for the technology companies is the global pandemic greatly boosted the cloud service, Carlson said. That trend is likely to continue and create additional opportunities for the dominant cloud service providers: Amazon, Google, Microsoft and IBM, he added.

Pension fund Chairman Bob Carlson answers questions from Paul Dykewicz during an interview before social distancing became the norm after the outbreak of COVID-19.

Microsoft: One of Five Technology Stocks to Consider for Purchase Despite Ebb in Growth

Microsoft’s earnings per share (EPS) in its fiscal fourth quarter reached $1.46, beating the $1.34 consensus estimate of analysts, while its revenues climbed to $38.03 billion, topping forecasts of $36.54 billion. However, Microsoft reported a slight slowing in revenue growth of 50% in constant currency for its Azure product segment that offers a set of cloud services to help organizations build, manage and deploy applications on a global network.

The company’s shortfall in meeting the modestly higher growth expectations of analysts led Oppenheimer analyst Timothy Horan to cut his rating on Microsoft to “perform” from “outperform” on July 23, the day after the software provider released its latest financial results. Horan warned that slowing growth in Microsoft’s cloud business would boost competition and expenses.

Such action may signal weakening growth for cloud services as enterprises cut information technology (IT) budgets and as small business (SMB) churn rises due to the recession, Horan wrote in a research note. His downgrade in Oppenheimer’s rating for Microsoft also factored in the software company’s valuation reaching all-time highs, he added.

Chart Courtesy of www.StockCharts.com

The consensus analysts’ average price target advanced 3.2% to $227.59 after Microsoft released its latest financial results. Even so, Microsoft’s reduced growth during its fiscal fourth quarter that ended on June 30 dimmed some of the stock’s appeal, despite reporting strong profits and revenues. In fact, Microsoft’s fiscal fourth-quarter financial results beat analysts’ consensus estimates for both earnings per share (EPS) and revenues, despite the economic contraction caused by the COVID-19 crisis.

Amazon Gains Appeal as One of Five Technology Stocks to Consider for Purchase

Amazon Web Services, a subsidiary of Amazon.com (NASDAQ:AMZN), provides on-demand cloud computing platforms and Application Programming Interface capabilities to individuals, companies and governments on a metered, pay-as-you-go basis. Microsoft claims on its website that AWS is five times more expensive than its Azure for Windows Server and SQL Server. Seldom does a company use one of its own website pages to name a top competitor, but Microsoft took the unusual approach of targeting Amazon Web Services directly as a needlessly costly rival.

Amazon is so popular with investors that it currently commands a P/E ratio of 120.65. However, income investors will not like that it pays no dividend.

Chart Courtesy of www.StockCharts.com

“Microsoft is all about the cloud,” said Jim Woods, who leads the Successful Investing, Intelligence Report and Bullseye Stock Trader advisory services. “The pandemic has created a work-from-home society, and that has created greater demand for safe and secure cloud computing services such as those offered by the software giant.”

Woods recommends Microsoft, which offers a current dividend yield of 0.96%, in the Prime Movers portfolio in Successful Investing, and he helped his subscribers gain a 16.3% return in the stock after putting it in his Intelligence Report Tactical Trends Portfolio.

Paul Dykewicz meets with Jim Woods before COVID-19 to discuss new investment opportunities.

The Commerce Department announced gross domestic product (GDP) fell at a seasonally and inflation-adjusted 32.9% annual rate in the second quarter, Woods wrote to his Intelligence Report members on July 31. That is 9.5% drop compared with the prior quarter, and it is the steepest decline in the more than 70 years that the Commerce Department has kept GDP records, he added.

Apple Gains Spot as One of the Five Technology Stocks to Consider for Purchase

Woods praised the financial performance of Apple, which beat consensus analysts’ estimates on both the top and bottom lines. The company also announced a 4-for-1 stock split.

Apple has a high P/E ratio of 33.34 but it offers a dividend yield of 0.75% that could be enough to entice investors who like income along with share price appreciation. Plus, Apple shares rose by 10.47% on July 31, the day after it announced its financial results.

Chart Courtesy of www.StockCharts.com

Facebook Fits in as One of the Five Technology Stocks to Consider for Purchase 

Facebook’s 8.17% share price jump on July 31, the day after it announced its financial results, ranked second among the four technology behemoths that reported quarterly performance the day before. The social media company also handily beat estimates, with “very solid performance,” although Woods added its management team said they expected growth to level off in the third quarter.

Facebook apparently had a surge of new users in the second quarter due to the novel coronavirus, but now that number is tapering off, Woods noted. The company has a P/E ratio of 31.87, so it is high but not quite as lofty as the other social media companies that reported results on July 30. It also does not pay a dividend. 

Chart Courtesy of www.StockCharts.com

Alphabet Added as One of the Five Technology Stocks to Consider for Purchase

Finally, GOOGL also beat earnings and posted overall solid numbers, although the company’s performance fell short of “blowout” accolades, Woods told me. Alphabet’s share price has been sliding in the days following its latest quarterly results. 

Chart Courtesy of www.StockCharts.com

Alphabet’s P/E ratio of 33.32 is on the high side, along with the other technology titans. But its recent share price retreat could entice fence-sitting investors if it drops to a low enough valuation. Income investors may want to look elsewhere, since the company currently does not pay a dividend. 

A Pullback in Microsoft May Spur a Buying Opportunity

“Results from Microsoft were baked into the stock, but results from Apple, Amazon, Google and Facebook obviously showed that one shouldn’t bet against the U.S. consumers and businesses,” said Bryan Perry, who heads the Cash Machine, Premium Income, Quick Income Trader, Hi-Tech Trader and Breakout Profits Alert advisory services.

Microsoft remains the world’s most trusted technology stock, even if cloud revenues came in a “tad light,” Perry said. Microsoft’s other businesses, such as Outlook 365, LinkedIn, Surface, Xbox, TEAMS and the vaunted Windows 10 operating system, are “very strong, added Perry, who told me a “decent entry point” for new investors would be $195 or less.

Paul Dykewicz interviews investment guru Bryan Perry at the Orlando MoneyShow.

Microsoft’s management affirmed guidance for earnings growth of about 7% in the coming year. Compared to the S&P 500, where profit contracted 44% last quarter, and may end 2020 with a 20% drop, dividend-paying Microsoft stands out, Kramer continued.

“Everything else being equal, I’d rather own Microsoft than the S&P 500 as a whole,” Kramer said. “However, the time to buy in was when the stock had been beaten down to $135 just four months ago. At the bottom, mighty Microsoft was available for only 23 times earnings. This was clearly a bargain that Wall Street couldn’t ignore.”

Microsoft Is Losing Market Share in Key Cybersecurity Niches, Analyst Says

Andrew Nowinski, an equity research analyst with D.A. Davidson, cautioned that Microsoft perennially loses market share in the cybersecurity niches of email, identity and endpoint security where it operates. Microsoft appears more focused on fixing “vulnerabilities” in Windows, which is a “huge source of breaches,” than in providing best-in-class solutions in any of those three areas, he added.

Investors should keep in mind the COVID-19 crisis has caused 18,543,662 cases and 700,714 deaths globally, along with 4,771,236 cases and 156,807 deaths in the United States, as of Aug. 5. America has more cases and deaths of any other country, including China, where COVID-19 first arose.

Microsoft is a computer software powerhouse that could find TikTok offers a way to address its slowing growth amid stiff competition from its rivals. Investors willing to wait for Microsoft to try to cobble together an agreement to buy the U.S., Canadian, Australian and New Zealand operations of TikTok within the six-week deadline set by President Trump may find a chance to purchase the software company’s shares at a reduced price if the negotiations show any short-term signs of an impasse.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is endorsed by Joe Montana, Joe Theismann, Ara Paseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others.