5 Sep

Three Tech Stocks to Buy for 2020

WRITTEN BY Aditya Raghunath

Tech stocks have been massive wealth creators over the years. Stocks like Apple, Microsoft, and Amazon have generated huge returns. Tech stocks have a high beta, which means they outperform indices in a bull run but are also subject to volatility in a downturn.

We know the yield curve has inverted. The yield curve has been a recessionary indicator for five decades now. The inverted yield curve tends to precede a recession by 12 to 24 months. So investors still have time to play the market, and they can pick tech stocks with significant upside potential. Here we look at three tech stocks trading at attractive valuations. All three should move higher before the next recession annihilates the stock market.

Amazon, a giant among tech stocks

Yes, Amazon (AMZN) is still trading at a cheap valuation despite gaining 454% in the last five years. This tech heavyweight continues to fire on all cylinders. It’s expected to grow sales 19.8% in 2019 and 18.9% in 2020. While earnings per share are expected to grow 17% this year, they should grow by a robust 40.8% in 2021 and at an annual rate of 83% over the next five years.

Compare these numbers to Amazon’s forward PE multiple of 55x. You can see that the stock has significant upside potential. Amazon should continue to gain traction in the highly profitable cloud business. And the company’s eyeing e-commerce expansion in emerging economies. It might very well be the first public company to be valued at $2 trillion.

RBC Capital has increased its 12-month price target on Amazon from $2,600 to $2,250. The investment bank is optimistic about Amazon’s one-day delivery for its Prime members. Over 90% of analysts covering AMZN recommend a “buy.” They have a 12-month average price target of 2,269 for Amazon, which indicates upside potential of 23.7%.

AMZN stock has gained 22% year-to-date. It’s trading at $1,835 per share.

Alibaba, a Chinese monolith

China’s (FXI) Alibaba (BABA) is a stock that has outperformed the broader indices since its IPO. The Alibaba stock has returned over 100% since it was publicly listed in September 2014. After a disappointing 2018, Alibaba has made a strong comeback and gained 30% year-to-date.

While China’s economy is in a slowdown, Alibaba investors will be banking on high growth in e-commerce to drive sales. Alibaba has plenty of growth drivers since China’s middle class will continue to expand—as will the country’s internet users and consumer spending over the next few years. The stock will also get a boost if the trade war comes to an end or if tensions manage to recede, according to this Investor Place report.

Alibaba’s sales are expected to rise 30.4% to $71.38 billion in 2019 and 29.2% to $92.21 billion in 2020. Analysts expect earnings per share to rise 22.2% in 2019 and 25.7% in 2020. Alibaba stock is trading at a forward PE multiple of 20, and we can see that it’s undervalued, given the company’s growth rates.

Currently, 98% of analysts covering Alibaba recommend a “buy.” They have a 12-month average target price target of $222 for the stock, which indicates upside potential of 25%.

Autodesk, another strong bet

Autodesk (ADSK) stock has gained 173% over the last five years. The stock is up 14.3% year-to-date. Despite the impressive returns, ADSK investors have lost 15.5% since July 2019. Autodesk announced its second-quarter results for fiscal 2020 last week. It also reported revenue of $797 million, a rise of 30% year-over-year.

ADSK shares have seen a pullback recently. The company lowered its EPS estimates for 2020. Investors chalked up the revised outlook to trade tensions and macro uncertainty. ADSK stock is trading at a cheap valuation, and it should move higher over the next 12 months.

Autodesk’s sales are expected to rise 26.7% to $3.26 billion in 2020 and 21.8% to $3.96 billion in 2021. Analysts expect earnings per share to rise 173.3% in 2020 and 63% in 2021. Autodesk stock is trading at a forward PE multiple of 32.6x, and you can see that it’s grossly undervalued, given the company’s growth rates.

Currently, 82% of analysts covering Autodesk recommend a “buy.” They have a 12-month average target price target of $174 for the stock, which indicates upside potential of 18.4%.

Tech stocks for rising uncertainty

These tech stocks are a safe bet, given the market uncertainty and rising trade tensions between the US and China. We’ve seen tech stocks rally significantly before a recession only to undergo a massive correction when the economy tanks.

Market Realist analyst Aditya Raghunath holds no position in the stocks mentioned above.

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