Tech stocks took a huge hit in 2022. Similar to what happened in 2008 and 2001, investors appear to be distancing themselves from disruptive high-growth stocks in fear of a possible recession that could further erode the value of companies in growth. Empirical evidence shows that this can be a costly mistake.
As the technology sector takes a beating, the information technology sector of the S&P 500 is down 18% over the past 12 months. That lackluster performance wiped billions of dollars off the market value of some of the world’s leading tech companies, but at the same time created plenty of new opportunities for growth investors to grab with both hands. Microsoft Corporation (NASDAQ: MSFT) and Texas Instruments, Inc. (NASDAQ:TXN) are two disruptive tech stocks to consider owning this year, and I’m bullish on both companies.
Microsoft’s growth will come from multiple avenues
Microsoft is well known for the products and services the company offers from its PC segment, but the cloud business is the jewel in the company’s crown today. In the September quarter, the Intelligent Cloud segment reported $20.32 billion in revenue, accounting for more than 40% of the company’s revenue.
Microsoft is one of the leading players in the global cloud computing market along with Amazon.com, Inc. (NASDAQ: AMZN) and Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOZ), and the company enjoys solid operating margins of over 44% from its cloud business. In comparison, Google has yet to see profits from its cloud business, while Amazon’s cloud operating margin hovers around 25%.
Therefore, Microsoft is not only the leader in the cloud computing market, but also a profitable business, which leaves enough room for the company to grow aggressively in the coming years.
Microsoft-owned LinkedIn remains under-monetized, but the company has made steady progress monetizing LinkedIn over the past few years. In the third quarter, LinkedIn reported revenue growth of 16% year over year to $3.66 billion.
LinkedIn is increasingly becoming the platform of choice among both recruiters and job seekers in all major regions of the world and the company has introduced several value-added services and subscriptions such as LinkedIn Learning, LinkedIn Recruiter, LinkedIn Sales Navigator and other premium membership levels to monetize a daily active user base of more than 134.5 million.
In the coming years, LinkedIn is likely to become a major driver of Microsoft’s growth as it establishes itself as the primary platform for B2B sales and headhunting.
Microsoft’s future growth will also come from the expected expansion of its subscription business and potential profits from its investment in OpenAI, the developer behind the wildly popular ChatGPT bot. Microsoft invested $1 billion in OpenAI in 2019, and the company recently announced a billion-dollar investment plan in OpenAI.
Texas Instruments is the leader in the category
The semiconductor industry is cyclical, making investing in chip stocks like TXN a difficult task for many investors due to the underlying volatility in earnings and stock prices. However, strategically investing in chip makers that enjoy durable long-term competitive advantages can help investors beat the market in the long run.
Texas Instruments is the undisputed leader in the global analog semiconductor market with a market share of around 20%, and the company’s size and scale make it extremely difficult for a competitor to dethrone Texas Instruments.
The company serves some of the world’s largest companies and benefits from intangible assets ranging from high customer switching costs to custom chip design capabilities. These competitive advantages will help Texas Instruments earn economic profits for the foreseeable future.
Global digitization is expected to gain momentum as the global economy enters its recovery phase, and semiconductors will play a huge role in this movement, as high-performance chips are the key to the digitization of many business sectors.
Although many investors focus on digital chip makers, analog chips are essential components to help digital chips function properly. Analog chips are widely used in sectors such as automotive and industrial manufacturing, and Texas Instruments is strategically well positioned to drive revenue growth as these two business segments recover.
Should you buy MSFT and TXN? Analysts weigh in
As Microsoft cuts thousands of jobs and the tech sector as a whole is under pressure, both Microsoft and Texas Instruments have come under the scrutiny of analysts. However, not all analysts are bearish on the outlook for these two companies. Wedbush Securities recently listed Microsoft as one of its top stock picks for 2023. Based on estimates from 29 Wall Street analysts, Microsoft has an average target price of $282.16, suggesting a potential upside of 16.3% from the current market price.
Goldman Sachs (NYSE:GS) strategist David Costin recently wrote that Texas Instruments will be one of the biggest winners from China’s reopening. Nevertheless, based on estimates from 19 Wall Street analysts, Texas Instruments has an average target price of $178.18, suggesting that the company is fairly valued by the market today.
Conclusion: MSFT and TXN shares look attractive
Technology stocks have made a strong recovery in 2023 so far on the back of an unforgettable 2022. Microsoft and Texas Instruments look poised for strong growth over the next few years, and both companies have extremely attractive features.
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