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5 Technology Bigwigs to Buy on the Dip for Gains in 2023

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Just four weeks of trading are left to complete a terrible 2022, in which the technology sector has suffered the most. The technology sector, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, has suffered since the beginning of this year as most market participants were extremely concerned about the sector’s overvaluation in the last two years.

As 2022 progressed, 40-year high inflation in the United States, Fed’s ultra-hawkish monetary tightening with a record-high interest rate to combat inflation and concerns about a near-term recession resulted in a sharp decline in the technology sector’s valuation.

The Technology Select Sector SPDR (XLK) — one of the 11 broad sectors of the S&P 500 Index — has tumbled 22.2% year to date. The tech-heavy Nasdaq Composite Index has plunged 26.7% year to date and is currently in a bear market.

Consequently, the technology sector is no longer overvalued. Moreover, it seems that peak inflation is behind us as indicated by several measures of inflation in October. Fed Chairman Jerome Powell’s recent comment about a possible lowering of the magnitude of interest rate hike in December FOMC meeting will be highly advantageous for this sector.

At this stage, it should be prudent to invest in large-cap (market capital > $20 billion) technology stocks with a favorable Zacks Rank for gains in 2023.

Technology is the Best Bet for the Long Term

The recent meltdown of the technology sector is a temporary phenomenon. The fundamentals of this sector are rock solid. We must not forget that the growing demand for hi-tech products has been a catalyst for the sector in an otherwise tough environment. A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, has given a boost to the overall space.

Tech Has Vast Potential — Buy on the Dip

The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication and not data serve most of their needs. Even those using smartphones, rarely utilize online digital features.   

However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. People were not entirely used to digital platforms for their office work (work from home), ordering food and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.

The countries that are more digitized have been able to minimize their losses during the pandemic. These are major lessons for other countries. Even those who are less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now feeling the massive advantage of online platforms.

Our Top Picks

We have narrowed our search to five large-cap technology stocks with attractive valuations. The stocks have strong growth potential for 2023 and have seen positive earnings estimate revision for the next year in the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

THe chart below shows the price performance of our five picks in the past monthx.

Zacks Investment Research
Image Source: Zacks Investment Research

Airbnb Inc. (ABNB - Free Report) is riding on an improvement in the travel industry. Continued recovery in both longer-distance and cross-border travel owing to a reduction in travel restrictions is benefiting ABNB’s Nights & Experience bookings. Additionally, growth in average daily rates and gross booking value is a tailwind.

Growing active listings in Latin America, North America and EMEA are contributing well to the top line. Growing sales and marketing initiatives along with continuous efforts to upgrade various aspects of the Airbnb service are helping the company gain momentum among hosts and guests.

Airbnb has an expected earnings growth rate of 15.6% for the next year. The Zacks Consensus Estimate for next-year earnings has improved 6.8% over the last 30 days. The stock price of ABNB is currently trading at a 47.3% discount from its 52-week high.

Datadog Inc. (DDOG - Free Report) is benefitting from new customer additions and increased adoption of its cloud-based monitoring and analytics platform driven by accelerated digital transformation and cloud migration across organizations.

The solid adoption of Synthetics and Network Performance Monitoring products are expected to aid customer wins for DDOG in the near term. Contributions from a solid cloud partner base, including Google Cloud, Microsoft Azure and Amazon Web Services, remain the key growth driver for DDOG besides an expanding portfolio.

Datadog has an expected earnings growth rate of 17.4% for the next year. The Zacks Consensus Estimate for next-year earnings has improved 10.5% over the last 30 days. The stock price of DDOG is currently trading at a 59.9% discount from its 52-week high.

Fortinet Inc. (FTNT - Free Report) is benefiting from rising demand for security and networking products amid the coronavirus crisis as a huge global workforce is working remotely. FTNT is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings.

Moreover, continued deal wins, especially those of high value, are solid drivers. Higher IT spending on cybersecurity is expected to aid Fortinet grow faster than the security market. Also, focus on enhancing its unified threat management portfolio through product development and acquisitions is a tailwind for FTNT.

Fortinet has an expected earnings growth rate of 20.6% for the next year. The Zacks Consensus Estimate for next-year earnings improved 6.2% over the last 30 days. The stock price of FTNT is currently trading at a 27.9% discount from its 52-week high.

Paycom Software Inc.  (PAYC - Free Report) is a provider of cloud-based human capital management software as a service solution for integrated software for both employee records and talent management processes.

PAYC’s differentiated employee strategy, measurement capabilities and comprehensive product offerings are helping it win new customers. Further, solutions like Ask Here and Manager on-the-Go, both focusing on employee usage and efficiency, are tailwinds.

Paycom has an expected earnings growth rate of 23.3% for the next year. The Zacks Consensus Estimate for next-year earnings has improved 0.6% over the last 30 days. The stock price of PAYC is currently trading at a 23.2% discount to its 52-week high.

VeriSign Inc. (VRSN - Free Report)   ended the third quarter of 2022 with 174.2 million .com and .net domain name registrations, up 1.2% year over year. VRSN’s performance is being driven by growth in .com and .net domain name registrations.

VeriSign is expected to benefit from growing Internet consumption globally. VRSN continues to expand its critical infrastructure to tap the growing demand for DNS navigation services in industries like commerce, education and healthcare.

VeriSign has an expected earnings growth rate of 11.2% for the next year. The Zacks Consensus Estimate for next-year earnings improved 0.1% over the last 30 days. The stock price of VRSN is currently trading at a 21.4% discount to its 52-week high.

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