A multiyear bull market in the technology sector could be on shaky ground in 2022. So while in most years, investors might succeed with a broad-indexed approach to the sector, it might pay to be a stock picker in the space this year.
A smart place to start: our 12 best tech stocks for 2022.
Technology faces an uphill climb this year for several reasons. Most notably, at 27.9 times the coming year’s earnings estimates, tech is the second-priciest sector in the market, behind only consumer discretionary (31.1). And that’s just the sector average – it’s not uncommon to see tech stocks trading at triple-digit forward price-to-earnings (P/E) ratios. Finance.
Also noteworthy are the actions of the Federal Reserve. With inflation hitting levels not seen since the early 1980s, the U.S. central bank has taken a hawkish tone. Easy monetary policy is likely to tighten up over the coming year; the Fed itself anticipates three rate hikes to its benchmark rate in 2022, which would certainly cut into the sector’s fat margins. Finance
But if you can stand a little heat, technology still looks like one of the best places to generate excess returns. Finance
“Valuations still look expensive relative to the S&P 500,” say RBC Capital Markets strategists in their 2022 outlook. However, “Tech ranks the best among all sectors on our quality metrics, ranking at or near the top for all factors that we evaluated.” Finance
Read on as we unveil our 12 best tech stocks to buy for 2022. Every stock here is a member of the Russell 3000, which covers most of the investable U.S. market. Moreover, each stock here receives a consensus Buy rating, according to analysts surveyed by S&P Global Market Intelligence. This list covers a wide range of approaches, from trillion-dollar tech behemoths to recent initial public offerings (IPOs) looking to disrupt established technologies. Finance
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International Business Machines
- Market value: $119.9 billion
- Dividend yield: 4.9%
- Analysts’ opinions: 4 Strong Buy, 1 Buy, 12 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 2.47 (Buy)
The past decade has not been kind to shareholders of International Business Machines (IBM, $133.66). The stock price has declined from the $180s to the $130s – meanwhile, the broader market has posted a gain of nearly 280%.
IBM’s biggest missteps were missing the early opportunities in the cloud and fumbling its efforts with artificial intelligence (AI). But investors shouldn’t through in the towel. The company has been making smarter moves of late that should boost the fortunes of this legacy tech name.
Among them: IBM recently spun off Kyndryl Holdings (KD), which was its information technology outsourcing division. The business had long lagged because of low margins and intense competition.
Also, CEO Arvind Krishna, installed in April 2020, has focused on becoming the leader in the hybrid cloud business, which he believes is worth more than $1 trillion worldwide.
IBM is positioned nicely here. The company has a deep portfolio of infrastructure software that can manage public and private clouds as well as traditional datacenters. The $34 billion acquisition of Red Hat is key to this this strategy. The business is the largest provider of open-source software for the enterprise, with applications for virtualization, integration, process automation and more.
As the recent AWS outage showed, there are considerable risks relying on one public cloud platform. Businesses simply need high IT stability. Private clouds and data centers may also be better options for certain applications because of security.
IBM reported more than 3,500 hybrid-cloud customers in October, up from 3,200 in July.
“The more favorable business mix resulting from nurturing growth markets and spinning off Kyndryl is expected to drive strong free cash flow generation, even on a substantially lower revenue base,” says Argus Research analyst Jim Kelleher, who rates shares at Buy.
The stock is also dirt-cheap, at a forward price-to-earnings (P/E) ratio of just 11 versus nearly 28 for the technology sector. IBM also is a rarity among 2022’s best tech stocks in that it’s a Dividend Aristocrat – one that has raised its payout for 26 consecutive years and currently yields nearly 5%. Finance
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- Market value: $9.4 billion
- Dividend yield: N/A
- Analysts’ opinion: 2 Strong Buy, 3 Buy, 4 Hold, 1 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 2.40 (Buy)
Dropbox (DBX, $24.54) came public in March 2018 to a lot of investor excitement. The file-hosting company was growing quickly and seemed primed to disrupt the storage industry.
Returns, unfortunately, have been meager (indeed, negative!) since then amid competition from companies large and small, including mega-caps such as Alphabet (GOOGL) and Microsoft (MSFT). But the prospects for Dropbox finally appear to be improving.
Dropbox has been expanding its services, including the likes of digital signature program HelloSign, as well as DocSend, which allows for the secure sharing of business documents. DBX also has been aggressively building out offerings for remote workers, including video, collaboration and feedback.
Dropbox has scale to work with, boasting a massive user base of more than 700 million registered users. That means even a small increase in average revenue per user (ARPU) can really move the needle.
Another thing that could move the needle on DBX shares is a little activist agitation. Investor Elliott Management reportedly snapped up a double-digit stake in DBX last summer, and the investment firm has built a history of solid returns in the tech world.
Wall Street analysts are also getting upbeat on Dropbox stock. For example, Jefferies has a price target of $40, which compares to the current stock price of $24. The analysts believe there are multiple drivers, such as the addition of new features, M&A opportunities and the move to provide industry-specific applications. Finance Finance
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- Market value: $2.9 billion
- Dividend yield: N/A
- Analysts’ opinion: 3 Strong Buy, 2 Buy, 6 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 2.27 (Buy)
In 2011, Internet pioneer and venture capitalist Marc Andreessen wrote an article in the Wall Street Journal called “Why Software Is Eating The World” that certainly looks prescient now. Software has led to the disruption of numerous industries, and companies from virtually every sector have been forced to adopt software in several ways just to keep the lights on.
However, this has translated into a growing demand for systems to manage all that software. That means dealing with global teams, different platforms, real-time changes and other hurdles.
Enter JFrog (FROG, $29.70). This company has built a platform that manages the development, deployment and monitoring of software, whether it’s in an on-premise or cloud environment.
JFrog’s go-to-market strategy has traditionally been organic, relying on adoption from developers. It has delivered growth this way, but it did make it difficult to land larger enterprise deals.
Lately, however, the company has bolstered its direct sales force, in part helped by the influx of funds from its 2020 IPO. JFrog ramped up spending on sales and marketing to $24.3 million in the latest quarter, up from $14.8 million in the year-ago quarter. However, during this period, the number of customers with annual recurring revenues (ARR) greater than $100,000 spiked by 49% to 466.
“We believe the company is well positioned to sustain 30%-plus revenue growth in coming years as it leverages its unique position within the DevSecOps workflow,” say Stifel analysts, who upgraded the stock to Buy from Hold in December. “Building off its core Artifactory binary management solution, the company has assembled a growing suite of solutions to help customers more effectively and efficiently build, manage, distribute and secure their respective applications.”
And Stifel’s price target of $45 per share would translate into a 52% return across 2022. If achieved, that would easily put JFrog among 2022’s best tech stocks to buy. Finance
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Wall Street didn’t like what it saw out of Cisco Systems (CSCO, $63.37) when it reported earnings in November, selling shares by about 8% in one day. Among the concerns were supply-chain issues, which hampered growth.
Supply-chain issues, of course, imply that the issue isn’t demand – it’s supply. This shouldn’t be a surprise. 5G rollouts, cloud computing, security and more all require networking infrastructure, and that’s what Cisco delivers.
“Cisco is successfully shifting its mix away from over-reliance on hardware and toward an integrated software, hardware, and services solution,” says Argus Research’s Kelleher, who rates the stock at Buy. “On that basis, Cisco has been able to maintain high pretax margins while continuing to generate strong free cash flows. We believe that category leader Cisco represents … a core long-term holding.” Finance
- Market value: $1.9 billion
- Dividend yield: N/A
- Analysts’ opinion: 6 Strong Buy, 2 Buy, 6 Hold, 0 Sell, 1 Strong Sell
- Analysts’ consensus recommendation: 2.20 (Buy)
Zoom (ZM) gets much of the attention when it comes to videoconferencing, but other players are worth considering – and some offer up much cheaper valuations.
For instance, 8×8 (EGHT, $16.76) trades at a mere three times sales versus about 14 for Zoom.
Founded in 1987, 8X8 initially developed hardware systems for videoconferences. But the company has since broadened its product line to software, such as Voice over Internet Protocol (VoIP), video and messaging. 8X8 has traditionally catered to smaller customers, but it has gone upmarket over the past few years. It currently boasts 871 customers with ARR of more than $100,000, compared to 670 customers at the end of 2020.
Also bullish is 8×8’s December announcement that it had spent $250 million to purchase Fuze, a top provider of cloud-based communications for the enterprise. Fuze is expected to add about $130 million in revenues, bring the paid customer base up to 2.4 million from 2 million, and bring enterprise customers up to 1,200 from 900.
William Blair analysts are among those in the Buy camp given “the strengthening growth profile, improving margins and increased penetration of the global enterprise cloud communications market.” Finance
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- Market value: $15.2 billion
- Dividend yield: 1.9%
- Analysts’ opinion: 3 Strong Buy, 2 Buy, 2 Hold, 1 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 2.13 (Buy)
In 2019, security software developer Symantec sold its enterprise security business to Broadcom (AVGO) for $10.7 billion. The remaining entity, which would focus on consumer cybersecurity, changed its name to NortonLifeLock (NLOK, $25.98).
Unfortunately for shareholders, the move hasn’t resulted in much upside since then. But this could change soon thanks to its August move to buy Europe-based consumer cybersecurity software provider Avast for more than $8 billion.
On a combined basis, NortonLifeLock will have more than 500 million users and generate about $3.5 billion in revenues. The deal should result in about $280 million in annual gross cost synergies. And better still: The company expects the acquisition to be double-digit accretive to earnings per share (EPS) within the first full year after the deal closes.
Global consumer cybersecurity is an underpenetrated market, with NortonLifeLock analysis saying that less than 5% of the world’s 5 billion internet users have paid subscriptions.
NLOK doesn’t have a large analyst following, but its overall rating puts it among the best tech stocks to buy for 2022. Among the bulls is Argus Research, which has the stock at Buy with a $32 price target over the next 12 months.
“The company has expanded its product line from the venerable Norton security firewall business into personal identity protection with the LifeLock acquisition, and is now expanding further in this area with new add-on and standalone products. Avast will add personal privacy-related solutions to the mix,” says Argus Research analyst Joseph Bonner. “At the same time, NLOK has been converting from a transactional perpetual license model to a typically more profitable recurring fee-based model with an initial ‘freemium’ offer. It has also begun to invest in both direct-to-consumer marketing and indirect sales through institutional partners like AAR.” Finance
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- Market value: $1.5 billion
- Dividend yield: N/A
- Analysts’ opinion: 4 Strong Buy, 1 Buy, 4 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 2.00 (Buy)
Founded in 1985, Pros Holdings (PRO, $34.49) is one of the early players in the AI market, though at the time of its founding, the technology was typically referred to just as “analytics.” The company developed pioneering systems that helped airlines with revenue management – systems that required sophisticated algorithms and huge sums of data.
Pros has since continued to build its platform and expanded into other industry verticals, including autos, B2B services, food, chemicals, energy and healthcare.
Acquisitions have been helpful in Pros’ expansion. Its latest deal, announced near the end of November, was for digital offer marketing pioneer EveryMundo, which helps its customers grow their reach and better engage customers.
Pros, which generated $247 million in Q3 2021 revenue, estimates the global market (which it calls underpenetrated) at $30 billion. And that global market could grow given the potential for AI to transform just about any industry.
PRO shares have struggled over the past few years, thanks in part to a COVID-related hit to its travel business. But a potential rebound could make it one of the best tech stocks for 2022.
“We believe Pros is well positioned now for FY22 and beyond as ARR growth returns to the mid- to upper-teens, driven by an improving mix of Travel-related ARR,” says Needham analyst Scott Berg, who rates the stock at Buy. Finance
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- Market value: $4.1 billion
- Dividend yield: N/A
- Analysts’ opinion: 7 Strong Buy, 3 Buy, 7 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 2.00 (Buy)
When it comes to AI, sophisticated algorithms typically get most of the attention. The irony? These technologies – which include machine learning and deep learning capabilities – are fairly standard. Since many have come from the academic world, they are often freely available as open-source.
Interestingly, a main differentiator for AI is the data. It often takes a lot of work to clean and structure it, and if not done right, the results can fall way off the mark.
This is why companies use offerings from companies such as Alteryx (AYX, $60.50). This software automates many of the manual data processes and helps track models. This can save time and money – and given the challenges of hiring data scientists, companies don’t want these vital personnel wasting their talent on tedious functions, no matter how vital.
Alteryx has posted meager financial results of late, but this could be set to turn around in 2022. One reason for this is the expected early 2022 launch of the Designer Cloud, which should help boost growth. AYX also has taken steps to improve its sales force, including offering better incentives.
“We are positive on the long-term strategic value of Alteryx’s platform, its large and growing [total addressable market], expanding partner leverage and increased focus on G2K opportunities,” says Oppenheimer, which rates the stock at Outperform (equivalent of Buy) and gives it a $105 price target, implying 73% upside from current levels.
Needham agrees, calling AYX “Buy-rated for patient, long-term oriented investors.” But even 2022 should be fruitful, given its analysts’ 12-month price target of $97 (60% upside). Finance
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- Market value: $13.7 billion
- Dividend yield: 0.3%
- Analysts’ opinion: 4 Strong Buy, 1 Buy, 3 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.88 (Buy)
Bentley Systems (BSY, $48.33), a software company that develops sophisticated modeling and simulation software for engineers, was founded in 1984 but only came public in September 2020.
And it did so in a pleasantly different way. The founders actually gave all of the proceeds from the offering to its 4,000-plus employees. Not only was it an amazing gesture, but it showed that Bentley Systems didn’t need the money. It already generates a substantial amount of free cash flow (the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business), which was expected to hit $260 million in 2021.
Bentley’s technology helps with a myriad of projects, whether for bridges, rail, transit, building, utilities and mining – just to name a few.
The future looks bright. The Biden administration’s massive infrastructure bill will help provide additional demand within the U.S. But BSY should also see upside from increased infrastructure investment in Europe and Asia.
As one typically expects from high-potential tech stocks, Bentley’s shares aren’t cheap, trading at a whopping 16 times sales. But given an average price target of $69 per share – implying more than 40% price growth over the next 12 months or so – analysts clearly believe the company deserves to trade at a premium.
Mizuho analyst Matthew Broome, who has a Buy rating and $74 price target on shares, says the company “is well-positioned to deliver greater penetration within the vast global market for constructed infrastructure. Furthermore, we believe its market dynamics are extremely attractive, which should underpin profitable long-term growth.” Finance
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- Market value: $105.2 billion
- Dividend yield: 0.2%
- Analysts’ opinion: 22 Strong Buy, 6 Buy, 6 Hold, 1 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.60 (Buy)
Traditionally, memory chip companies go through extreme boom-bust cycles. That has resulted in stomach-churning stock volatility that has dissuaded many would-be investors.
But this has moderated somewhat over the past decade. You can thank powerful megatrends in AI, the Internet of Things, edge computing, 5G and more that has powered enormous demand for memory chips that many have referred to as a “supercycle.”
Great news for Micron Technology (MU, $93.15), a global leader in the development of sophisticated DRAM and NAND memory chips. These and other storage solutions represent some 30% of the semiconductor market.
A key competitive advantage for Micron is its massive infrastructure, which includes manufacturing plants and research-and-development centers across 13 countries. It also sports a portfolio of more than 47,000 patents.
Micron is hardly done innovating, either. The company expects to shell out more than $150 billion over the next decade to bolster its manufacturing and R&D capabilities.
Deutsche Bank is among the outfits that are bullish on Micron, with recent supply-chain checks showing “robust demand especially for server DRAM with enterprise IT spending continuing to recover and hyperscale customers planning to invest aggressively for growth.”
Add to that a reasonable forward price-to-earnings ratio of less than 10, and MU could be one of the best tech stocks to buy in 2022. Finance
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- Market value: $11.2 billion
- Dividend yield: N/A
- Analysts’ opinion: 7 Strong Buy, 7 Buy, 0 Hold, 0 Sell, 0 Strong Sell
- Analysts’ consensus recommendation: 1.50 (Strong Buy)
Taxes can be boring and tedious, but just about every business has to deal with them. That makes taxes a massive industry – one that constantly changes over time as federal, state and local tax laws change.
Good news for Avalara (AVLR, $129.11), a developer of software to help businesses with tax compliance.
Avalara currently has more than 30,000 customers. Its extensive product line helps with sales and use taxes, value-added tax, excise taxes, goods and service tax, custom duties and indirect taxes, among other things. The Avalara platform processes billions of transactions every year, and files more than 1 million returns annually.
Growth is still running at a brisk pace, with most-recent-quarter revenues jumping 42% to $181 million. The company also is in a good financial position – it generated $11.4 million in operating cash last quarter, and total cash stands at $1.5 billion versus $960 million in long-term debt.
Avalara has bolstered some of its offerings via acquisitions. For instance, in October, AVLR announced it had acquired CrowdReason, which provides cloud software that helps with property taxes. Earlier in the month, Avalara said it bought Track1099, which helps companies manage, file and deliver IRS forms.
The stock has lost roughly a third of its value since early November, bringing shares to much more palatable levels. Mizuho, for instance, has a $220 price target on AVLR, implying 70% upside over the next 12 months alone. They are bullish on Avalara’s strategy of “incorporating international geographies, up/down-market penetration, deeper relationships with marketplaces and ecommerce partners, and strategic M&A to drive long-term revenue growth.”
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