Best technology stocks

·14-min read
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Technology stocks have taken a battering over the last nine months after the long bull run finally came to an end. The tech-heavy Nasdaq Composite index has fallen by 25% since its high at the end of 2021, while the share prices of Netflix and Meta have dropped by over 60% after disappointing results.

The macroeconomic environment has certainly taken its toll on the lofty valuations of technology stocks. Rising interest rates have reduced the valuation of technology shares, while high inflation has dampened both consumer and corporate demand for technology products and services.

Buying ‘on the dip’

However, reduced valuations may also present the opportunity for investors to ‘buy on the dip’ in the expectation that share prices will recover. Many of the large technology companies have the financial firepower to weather the current economic headwinds, with strong balance sheets and market-leading positions in high-growth sectors such as cloud services.

If you’re considering investing in technology stocks, the following five companies have rewarded shareholders with some of the highest returns amongst the largest global technology companies.

Data is sourced from Morningstar. The dividend yield is based on the trailing dividend paid over the last year divided by the company’s current share price. Returns are based on the average trailing total returns per year over the stated time period.

Remember: investing is speculative and your capital is at risk. You may not get back some or all of the money you invest.

Best Technology Stocks

 (Apple)
(Apple)

Apple (AAPL)

Market capitalisation: $2.6 trillion

Dividend yield: 0.6%

One year annualised return: 12%

Three year annualised return: 46%

Five year annualised return: 35%

What you should know:

Consumer electronics giant Apple is one of the few global companies valued at over $2 trillion. It has been at the forefront of technological innovation, from the introduction of the Apple personal computer in the 1970s to the more recent success stories of the iPhone and iPad.

The iPhone continues to underpin Apple’s core business, accounting for over half of sales. Apple enjoys a high level of brand loyalty, creating the opportunity to cross-sell the iPad, Mac and wearable devices to iPhone customers. Apple’s higher-margin services division is growing rapidly and includes Apple’s warranty, cloud storage, advertising and digital content services.

Apple reported record revenue in its latest quarterly results, underpinned by strong demand for the iPhone 13. It hopes that upcoming product releases will drive revenue growth, including the transition to 5G phones, the M2 processor for the MacBook and a rumoured virtual reality headset.

However, Apple may face increasing headwinds with hardware sales likely to be impacted by the squeeze on consumer spending. This could have a knock-on effect on services revenue, although services such as cloud storage are likely to be more resilient. The strengthening of the US dollar is also having a negative effect on the value of revenue generated outside the US, which accounts for 60% of total revenue.

Apple is a highly cash-generative business with net cash of nearly $60 billion. This has enabled the company to undertake a substantial share repurchase program, in addition to paying dividends to shareholders.

Having hit a record high of over $180 in December, Apple’s share price has subsequently fallen by over 10%. However, its share price has been relatively immune to the heavy share price falls of other US growth stocks such as Meta and Twitter.

Despite the recent dip, Apple shareholders have enjoyed an annual return of 35% over the last five years. For investors looking for income, Apple is also unusual amongst tech companies in paying a dividend, albeit a modest one.

 (Microsoft)
(Microsoft)

Microsoft (MSFT)

Market capitalisation: $2.1 trillion

Dividend yield: 0.9%

One year annualised return: -1%

Three year annualised return: 28%

Five year annualised return: 32%

What you should know:

Microsoft was founded by Bill Gates and Paul Allen in 1975, playing a key role in the development of the personal computer. Microsoft is a market leader in software services, from its Windows operating system to extensive cloud offering, and incorporates brands such as LinkedIn, Skype and Azure.

Microsoft boasts an enviable range of subscription-based services. The Windows operating system is loaded on over 75% of personal computers globally, compared to 15% for Apple’s Mac operating system, according to Statista.

The rise in remote working during the pandemic has fuelled the growth in demand for cloud services, with Microsoft reporting a 28% increase in cloud-based revenue in the last quarter.

Cloud services are expected to remain a growth sector, with Gartner forecasting global expenditure of $600 billion in 2023. Statista reports that Microsoft has a 21% share of the global cloud market, second only to Amazon.

Microsoft boasts a higher profit margin than its peers, with an operating margin of 40%, compared to less than 30% for Apple and Alphabet. Its highly cash-generative core business finances the significant up-front investment required for software development.

Once this initial cost has been incurred, Microsoft benefits from a high margin on software services due to the low incremental cost of adding new customers.

In terms of outlook, a reduction in discretionary spending is likely to impact Microsoft’s personal computing subscriptions. While Xbox gaming revenue has already fallen and this trend is likely to continue, for the short-term at least.

Advertising revenue may also be under pressure if the economic downturn continues and, as with Apple, the value of Microsoft’s significant non-US revenue has been impacted by the rising US dollar.

Microsoft’s share price has decreased by 30% from its peak of $350 in December 2021, however, it has subsequently risen by 16% over the last few weeks. It has delivered one of the highest average annual returns of 32% over the last 5 years, along with the highest dividend yield amongst these technology stocks.

 (Google)
(Google)

Alphabet (GOOGL)

  • Market capitalisation: $1.5 trillion

  • Dividend yield: not paid

  • One year annualised return: -14%

  • Three year annualised return: 24%

  • Five year annualised return: 20%

What you should know:

Google was founded in 1998 by Sergey Brin and Larry Page, later rebranding to Alphabet to emphasize its broader credentials beyond Google. Today, the Alphabet family includes the Android, YouTube, Nest, FitBit and Waze brands.

Google continues to dominate the internet search engine market, with a global share of over 80% according to Statista. This provides the foundation for its core advertising business, accounting for over 70% of advertising revenue, along with over 10% from the YouTube platform.

Cloud services continue to be one of Alphabet’s highest-growth businesses although its current market share of 10% is some way below Amazon and Apple. The cloud business remains loss-making due to the substantial infrastructure investment, although it has achieved quarterly revenue growth of over 35%.

However, competition remains intense, with YouTube competing against TikTok and Instagram reels in the video market. Alphabet is also facing regulatory scrutiny over the use of customer data and claims of antitrust practices.

In addition to its core business, Alphabet has made more speculative investments via its ‘Other Bets’ venture capital division. These ‘moonshots’ include self-driving car company Waymo and life science business Verily. Alphabet is also hoping that its recent acquisition of FitBit should help strengthen its presence in the health and fitness market.

Looking ahead, Alphabet hopes that cloud services will drive future growth. It expects advertising budgets to be pruned given the difficult economic environment, although digital advertising may be more resilient than other forms.

Alphabet has suffered a fall of over 20% in its share price since its peak of $152 in 2021. However, it has delivered an annual return of 20% for shareholders over the last five years.

Alphabet recently carried out a stock split to make its shares more affordable to retail investors as its share price had topped $2,200. Although it doesn’t currently pay a dividend, Alphabet has returned cash to shareholders via share buybacks.

 (Amazon)
(Amazon)

Amazon (AMZN)

  • Market capitalisation: $1.4 trillion

  • Dividend yield: not paid

  • One year annualised return: -19%

  • Three year annualised return: 13%

  • Five year annualised return: 22%

What you should know:

Online retail giant Amazon has been at the forefront of the online shopping revolution. In addition to e-commerce, it also provides cloud computing, digital streaming and artificial intelligence services.

Amazon’s profits have been boosted by the rise in online shopping during the recent lockdowns. It has a dominant position in many international markets, including a 41% and 34% market share in the US and UK markets respectively, according to Statista.

However, as Amazon’s retail business has grown in size, it has become increasingly difficult to maintain the rate of revenue growth. Margins have been squeezed by rising fulfilment costs, with significant increases in fuel, energy and transportation costs over the last two years. As a result, Amazon reported a $2 billion loss in its last quarter, down from a $8 billion profit in the equivalent period in 2021.

As with Apple and Microsoft, Amazon has invested heavily in the high-growth cloud services sector. Amazon’s cloud services business, AWS, is the global market-leader with a market share of 33%, according to Statista.

As a result of the increased cost base, Amazon recently announced a rise in the annual cost of Prime membership from £79 to £95 in the UK. While Netflix lost over a million customers after its price increase, Amazon is hoping that the appeal of free shipping will convince Prime customers to continue their subscriptions.

Looking ahead, Amazon is facing pressure in its core retail business from the double whammy of high inflation and rising interest rates. However, the continued roll-out of Amazon Fresh in the UK and US, development of in-store scanning technology and introduction of Prime air drone deliveries should help to drive future sales.

Amazon has been punished for its mixed bag of results in 2022, with its share price falling by almost 30% from its high of $188 in 2021. Although shareholders have been rewarded with an average annual return of 22% over the last five years, income-seekers may be put off by the lack of dividend.

 (NVIDIA)
(NVIDIA)

NVIDIA (NVDA)

  • Market capitalisation: $454 billion

  • Dividend yield: 0.1%

  • One year annualised return: -7%

  • Three year annualised return: 63%

  • Five year annualised return: 35%

What you should know:

Although a minnow compared to the other technology stocks, NVIDIA is a leading provider of high-end graphic cards for gaming consoles. NVIDIA’s graphics processing units are also used in a wide range of products beyond gaming, including medical imaging, driverless cars, cryptocurrency mining and artificial intelligence.

NVIDIA has delivered impressive results, posting revenue growth of 46% in its latest quarter, including a year-on-year increase of 83% and 31% in data centre and gaming revenue.

However, its operating margin has been squeezed due to the growth in headcount and product development, although NVIDIA outsources the manufacture of its chips. NVIDIA also incurred a $1.4 billion termination charge related to its failed acquisition of UK chip designer Arm, which was aborted after regulatory scrutiny on both sides of the Atlantic.

The outlook for NVIDIA is more mixed, with a likely slowdown in gaming revenue. The company forecasts continued growth in its data centre and artificial intelligence products, albeit at a lower rate. As a result, NVIDIA is taking cost-management measures including a slow-down in recruitment and product development.

Although NVIDIA only pays a modest dividend, it has embarked upon a substantial share repurchase programme. It has also rewarded shareholders with the joint highest annual average growth rate of 35% over the last five years.

Overall, NVIDIA shares have fallen by nearly 50% since their high of $346 at the end of 2021, due to the broader sell-off of US technology stocks. However, its valuation remains high relative to the other US technology stocks, with NVIDIA shares currently trading at a multiple of nearly 50 times earnings. Investors will be hoping that the company continues to deliver a high rate of revenue growth to justify this valuation premium.

Methodology

Our data is sourced from Morningstar. The dividend yield is based on the trailing dividend paid over the last year divided by the company’s current share price. Returns are based on the average trailing total returns per year over the stated time period.

Remember: investing is speculative and your capital is at risk. You may not get back some or all of the money you invest.

Frequently Asked Questions

Why should you invest in technology stocks?

It is likely that technology will continue to play a central role in the global economy. Technology companies have changed our daily lives beyond recognition, with artificial intelligence and virtual reality tipped as the next major developments.

Investors in technology stocks have been rewarded with some impressive gains over the last decade. Trustnet reports that the technology sector was the highest-returning fund sector, with a five-year return of 97%, including a 44% rise in 2020 alone.

Although the leading technology companies have delivered substantial growth in their share price, they may appeal less to investors looking for an income. Excess cash is typically reinvested in the business, rather than being paid out as dividends, although share buybacks have been common over the last two years.

Technology stocks are also cyclical, with revenue susceptible to a downturn in consumer and corporate spending. Soaring inflation has also led to a rise in interest rates, which hits the valuation of high-growth technology stocks the hardest. As a result, most technology stocks have fallen in price in 2022, with Meta, Twitter and Netflix suffering particularly steep drops.

There is typically a correlation between risk and return and some of the smaller, more speculative technology companies may provide superior returns to the large-cap stocks.

However, the large-cap technology companies can draw on significant financial resources, both in terms of investing in product development but also in weathering difficult trading conditions. Investing in large-cap technology stocks may therefore appeal to investors looking for a lower-risk option.

As with equity investing more generally, investing in technology stocks should be seen as a long-term investment. You should also consider how much you are willing to invest, given the risk that you may lose some, or all, of your investment.

How can you invest in technology stocks indirectly?

Investing in a diversified portfolio of technology stocks provides investors with potential upside if share prices rise while reducing the risk of an individual company underperforming. Although you could spread your investment across a basket of technology stocks, this can be expensive in terms of trading fees.

There are two main types of investments that can provide a ready-made portfolio of technology stocks for investors, being passively and actively-managed funds.

Passively-managed funds, also known as tracker or index funds, aim to replicate the performance of an index. The S&P 500 and Nasdaq 100 indices are heavily weighted towards technology stocks, or some funds track specific technology indices. Passive funds aim to provide an average return for the index as a whole and are a low-cost option, typically charging annual fees of 0.1-0.2%.

Actively-managed investments charge a higher fee, typically 0.5-1.0%, as the fund manager aims to outperform an index or benchmark. Investors have a wide choice of options including specialist technology funds, which may be focused on a particular region or size of company, and more generalist global or US funds which may have a high technology weighting.

Within active funds, investors have the option of investment trusts or funds. Investment trusts are priced ‘live’ like shares. Unlike funds, investment trusts are allowed to hold back 15% of income to allow them to maintain dividend payments in more challenging years. Funds are ‘forward priced’ meaning that you don’t know the price until after the transaction has executed.

How can you buy technology stocks?

Before deciding to invest in technology stocks, you should carry out your own research to ensure that the investment is suitable for your own individual circumstances.

The next step is to choose a trading platform, most of which offer the option to buy US shares. It’s worth taking the time comparing trading platforms, as the fees can vary significantly. You will typically pay a trading fee (generally a flat fee of £5-10) although some platforms charge no trading fees.

Will I need to pay a fee?

You may also have to pay an annual platform fee for holding shares. Some platforms charge no fee for this, others charge a flat fee and some charge a percentage, typically 0.25% to 0.45% of the value of your portfolio.

Buying US shares will incur a foreign exchange fee (typically 0.5-1.5% of the value of the purchase) unless you fund the purchase from a US dollar account. You will be asked to fill in a W-8BEN form (valid for three years) which allows you to benefit from a reduction in withholding tax for qualifying US dividends and interest from 30% to 15%.

You can buy the shares in a general trading account. However, buying the shares in a tax free wrapper such as an Individual Savings Account (ISA) or Self Invested Personal Pension (SIPP) means that any income or capital gains are free from tax.

Holding US shares also carries to foreign exchange risk as your shares will be worth less if the pound strengthens against the dollar (and vice-versa).