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All Contents © 2020The Kiplinger Washington Editors
By Dana Blankenhorn, Contributing Writer
| December 20, 2019
Tech stocks have been the star of the market through the first two decades of the 21st century. Expect that to continue into the third.
That said, the ways investors can play the technology sector have evolved over the years.
Once upon a time, tech stocks mostly seemed like speculative picks – high reward but equally high risk. However, technology's growing influence across all aspects of society, as well as the maturation of dozens of companies, has widened the field. Now, you can tap technology for consistent blue-chip growth, and in some cases, even for reliable dividends with decent yields.
The following are the 15 best tech stocks to buy for 2020, with options for several portfolio needs. Each stock is categorized as an income winner, an established grower or a great speculation. Income winners have a nice track record of making (and raising) payouts, established growers boast leadership positions and profits, and great speculations are either developing a new market or have a clear opportunity to disrupt entrenched leaders.
Data is as of Dec. 19. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Type: Great speculation
Market value: $2.0 billion
Dividend yield: N/A
Alarm.com Holdings (ALRM, $42.04) provides alarm and other home-security services via the internet. You may not have heard of it because it operates through re-sellers, who handle calls from its app.
The company was founded in 2000 as a spinoff of business intelligence firm MicroStrategy (MSTR). After being acquired by venture capital in 2009, it went public under the current name in 2015. Alarm.com's services integrate with voice interfaces such as Amazon.com's (AMZN) Alexa, Alphabet's (GOOGL) Google Home and Apple's (AAPL) Apple TV. The company currently boasts more than 6 million subscribers.
The stock ran hot for roughly four years following its IPO, but a cautious outlook in May – prompted in part by tariffs on Chinese goods – sent investors scattering. Management sees the trade war as one of its biggest risks, given that alarm monitoring systems are made in China. ALRM shares have dropped by more than 40% since then, bringing them to a 19% decline year-to-date.
Despite this, Alarm.com's revenues have continued to grow, and its most recent quarter included a 35-cent-per-share profit – up from a 16-cent loss in the year-ago period. Better still, the company upgraded its initial full-year outlook and now believes sales growth will be in the double digits.
Looking to the year ahead: The seven analysts that have put out research notes on ALRM over the past three months are mostly bullish, with five Buys and two Holds, as well as a consensus price target of $64.14, implying a gain of more than 50% over the next 12 months or so. Among those who have ALRM among tech stocks to like in 2020 is First Analysis' Howard Smith, who upgraded shares to Strong Buy in October. He sees shares hitting $75 in 2020 and believes this dip is an "opportune time" to take a stake.
Type: Established grower
Market value: $563.7 billion
Alibaba (BABA, $210.13) began as a business-to-business website in 1999, designed to let small Chinese manufacturers reach re-sellers and exporters in major cities. Today, it not only dominates e-commerce within the country, but owns shopping centers and grocery stores as well. It also offers film, TV and video streaming through its Youku unit, which recently signed a partnership deal with the Premier League's Manchester United soccer club – the world's most popular sports team.
Perhaps most importantly, however, Alibaba is the country's largest cloud computing company, offering not just infrastructure and a platform, but a full suite of financial and database applications. As Amazon.com shareholders have learned, the cloud business is a margin machine that can spin up robust profits in a hurry.
Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan, puts Alibaba among the best tech stocks for 2020 because the U.S.-China trade war has kept the stock price down – for now. In a few years, he predicts, current prices will look like a "steal."
Milan also notes a few other businesses that make Alibaba intriguing. "Most forget they are also involved in financial payments through Alipay, in healthcare with Alihealth, and in Southeast Asia with Lazada," he says.
Ramiz Chelat, portfolio manager with Vontobel Quality Growth, says 250 million people have come on to the Alibaba platform in the past three years alone, and their spending is growing. He also says BABA's logistics, payments and cloud businesses are all generating significant value.
They mirror the enthusiasm shown by the rest of the analyst community, which has been unanimous over the past three months in calling BABA a Buy.
Type: Income winner
Market value: $203.1 billion
Dividend yield: 3.0%
Cisco Systems (CSCO, $47.88) offers one of the better yields in technology, on a dividend that is covered roughly twice over by earnings, and that has been growing every year since it was initiated in 2011.
Cisco is known for its networking gear, and it briefly was the most valuable company in the world during the height of the dot-com boom. Today, CSCO is focusing on software it can sell by subscription, for managing networks and security.
Part of the reason why Cisco is yielding so much at the moment is weakness in the stock (yield is dividend divided by the price, so if the price goes lower, the yield gets bigger). Shares are up a disappointing 10.5% year-to-date – dwarfed by the S&P 500's 28% return – thanks to a considerable decline since July. Among the reasons for CSCO's weakness was its fiscal fourth-quarter earnings report in August, during which it gave disappointing guidance thanks in part to weakness in China.
This might be a blessing in disguise. It can be hard to find bargains in a toppy market, but this tech stock currently trades at just 14 times future earnings – not bad considering analysts still expect mid-single-digit profit growth over the next two years, and given Cisco's relatively high dividend for its sector.
And analysts did come away with one positive thing from that report: Cisco is successfully pivoting to subscription-based sales, which are not only more reliable, but can help grow revenues, too.
Market value: $50.8 billion
JD.com (JD, $34.78) is the No. 2 online retailer in China. It's also something of a logistics pioneer, too, pushing the envelope in delivery to remote Chinese villages by using robots and drones.
It stands to reason, then, that JD.com is considered the chief rival to Alibaba in China's e-commerce market. Their mascot is a cartoon dog, in contrast to the cartoon cat used by Alibaba. Stories about their rivalry thus talk about the "great cat-and-dog war."
JD.com, unlike some of the other tech stocks on this list, rocketed ahead in 2019, by 66%. The company's most recent quarterly earnings came to $700 million on revenues of almost $19 million, easily topping the company's own estimates. The Chinese consumer, despite the U.S.-China trade war, remains strong. Management credited robust growth in smaller cities, and among women buyers, for its result.
In summer 2019, fashion retailer Farfetch (FTCH) merged its online sales platform with JD.com's to better compete with Alibaba in the luxury-goods arena. JD also has partnered with Walmart (WMT) via a $500 million investment in online grocery delivery company Dada-JD Daojia.
Looking forward, JD.com is trying to better attract the market in so-called "lower-tier" Chinese cities, where spending is expected to triple by 2030, to $6.9 trillion annually.
Courtesy LAM Research
Market value: $42.6 billion
Dividend yield: 1.6%
Lam Research (LRCX, $293.29) is in the semiconductor business. But while most of the industry's familiar names are chipmakers themselves, Lam makes the machines that in turn produce semiconductors. These machines etch circuits onto silicon, deposit insulating or conducting materials, and strip and clean finished circuits. Chief competitors in this market include Applied Materials (AMAT) and KLA-Tencor (KLAC).
The cost of such equipment rises with each new generation, but Lam has about $1 billion more in cash on hand than debt, so it can keep up with the capital demands – and then some. What makes Lam Research an "income winner" among 2020's best tech stocks to buy isn't its yield, but the dividend growth this cash-generator can afford. LRCX more than doubled its payout, from 50 cents to $1.10 per share, in 2018, then threw in a 5% hike in mid-2019.
Lam Research's shares are attractive from a valuation perspective, says Robert R. Johnson, professor of finance at Creighton University's Heider College of Business and chairman and CEO of Economic Index Associates. The stock has a forward price-to-earnings (P/E) ratio of 15, versus 19 for the S&P 500, as well as a below-market price/earnings-to-growth (PEG) ratio of 1.4. (PEG takes into account future earnings growth.) LRCX also "has positive momentum as analysts have been increasing earnings estimates," he says.
KeyBanc's Weston Twigg is among nine analysts who have given Lam Research's shares a Buy rating over the past three months. He cites a "compelling" setup ahead of 2020, which should be a strong year for fab-equipment demand.
Market value: $14.4 billion
NetApp (NTAP, $63.23) produces storage devices for networks. It went through the 1990s dot-com bubble under the name Network Appliance. It reconfigured itself into a hybrid cloud company during the 2010s, and it now competes with the likes of International Business Machines (IBM) and EMC.
Like Cisco Systems, NetApp has focused more on software than hardware recently, creating services such as Active IQ, which allows users to gain insights via machine-learning algorithms and spend less time managing infrastructure.
The company is being conservatively managed at the moment. CEO George Kurian is concerned about the trade war lasting and says he is managing for "a variety of outcomes." Still, several analysts see upside in the year ahead. Argus analyst Jim Kelleher recently raised his price target on NTAP to $75, citing strong sequential product revenue growth and "undervalued" shares, among other bullish drivers.
Indeed, NTAP has gone through several booms since the dot-com era, peaking in 2011 and 2018. It recently went through a bust – a loss of nearly 40% between September 2018 and September 2019 – but is back on the upswing. That dip has helped amplify NetApp's yield, which currently sits around 3%. That's much better than the 1.9% you're getting on a 10-year Treasury bond.
Market value: $144.1 billion
Dividend yield: 0.3%
Chipmaker Nvidia (NVDA, $235.46) has expanded from its pole position in gaming chips, becoming a leader in hardware and software for artificial intelligence too.
From 2016 through about 2018, NVDA was one of the best tech stocks on the market, thanks in part to the Bitcoin boom. However, the cryptocurrency bust helped briefly cut the stock's price in half. An inventory recession in the chip industry contributed, too, sending shares as low sent the shares below $130 in late 2018, but they have since recovered some of their ground.
Cornerstone's Daniel Milan is bullish on Nvidia because of its lead in AI. He expects more Nvidia chips to be deployed soon at the "edge" of networks (closer to where the information being processed will be created or consumed). He cites adoption of Nvidia's edge computing platform by Walmart and the U.S. Postal Service, as well as a partnership with Microsoft (MSFT).
Wedbush chief technology strategist Brad Gastwirth considers NVDA one of his favorite ways to invest in several technology trends, including gaming, data centers and AI.
Nvidia's current fiscal year, which ends in January 2020, is expected to end with a 16% decline in profits, to $5.57 per share. However, analysts largely think it will rebound strongly in fiscal 2021, most of which is in calendar 2020. Experts are modeling 19% year-over-year revenue growth and a 30% pop in profits, to $7.23 per share.
Market value: $22.4 billion
Palo Alto Networks (PANW, $229.10), which produces "next-generation" firewalls for computer security, underperformed the market a bit in 2019 – and got there in a much more volatile way. The stock most recently was hit in November, after the company unveiled a disappointing outlook for the current quarter, which ends in January 2020.
In terms of raw numbers, that report wasn't so bad. Sales were up 17% YoY, and the company ended the quarter with more than $2.8 billion of cash and securities in the bank. But the short-term profit outlook was conservative, and also included expenses related to a proposed $150 million buyout of cloud security firm Aporeto.
Aporeto is expected to fortify Palo Alto's Prisma suite, which is designed to meet the demands of the latest security buzzterm: secure access service edge (SASE). SASE recognizes that employees will always spend a lot of time outside the corporate network, and that the internet is a dangerous place. Protecting the internal network thus requires protection against these risks, as well as intrusions.
Tricia Ross, a senior vice president with Financial Profiles in Los Angeles, sees SASE giving Palo Alto a long runway for growth. Cybersecurity spending is due to increase 50% by 2023, to $170 billion. Ross says Palo Alto's addressable market, about $19 billion in 2017, is now worth $72 billion.
Palo Alto is among several tech stocks that have attracted heavy analyst attention lately. Sixteen of the 22 pros sounding off about PANW over the past three months call it a Buy, including Jefferies' Brent Thill. Thill acknowledges its "near-term hiccup" but calls Palo Alto a "best-in-class security platform play" that could hit $275 per share over the next 12 months – a 20% gain.
Market value: $3.1 billion
Dividend yield: 3.3%
QTS Realty Trust (QTS, $52.69) operates data centers across 6 million square feet of space through North America. In addition to hosting corporate data facilities, it lets enterprises connect to "the cloud," and it allows various cloud systems to connect to one another.
It's organized as a real estate investment trust (REIT), which exempts it from federal taxes in exchange for distributing at least 90% of its earnings to shareholders in the form of dividends.
The 2010s were good to data-center REITs. QTS, which went public in October 2013, has shot ahead by 152% since then – better than the S&P 500's 92%, and the 39% performance of the Vanguard Real Estate ETF (VNQ). The stock also outperformed in 2019, gaining 42% with less than two weeks to go … and its dividend still yields north of 3.3%.
QTS is one of the smaller players in its space, with a market cap of $3.1 billion, but remains acquisitive. The company picked up two data centers in the Netherlands in April, for instance, expanding its geographic footprint.
Nine analysts have sounded off on QTS within the past three months, and all but one slapped it with a Buy (or equivalent) label. BMO Capital's Ari Klein, for instance, reaffirmed his Outperform rating on the stock and raised his price target to $60 per share, implying 14% upside. The call came in November after the company beat expectations for funds from operations (FFO, an important profitability metric for REITs). Klein cheered the company's "impressive" hyperscale wins and its "well-balanced leasing performance."
Market value: $144.9 billion
Salesforce.com's (CRM, $163.33) initial niche was customer relationship management (CRM), and this became its stock ticker when it went public in 2004. Since then, it has expanded into all areas of database-driven management.
While Oracle (ORCL) and SAP (SAP) dominated the world of on-premise databases in the 2000s, Salesforce is dominating the cloud database world of today, selling applications on top of basic technology through a subscription model.
Salesforce.com has delivered average annual sales growth of 27% over the past five years, including a roughly 26% year-over-year improvement for its fiscal year ended January 2019. And CEO Marc Benioff said in the company's most recent quarterly earnings report that Salesforce is "on track to double our revenue in five years."
The company is constantly acquiring other companies to generate that growth, which occasionally pinches the bottom line. Indeed, Q3 resulted in a 12-cent-per-share loss after buying Tableau Software for more than $15 billion in a stock transaction. (CRM also expects a small 3- to 4-cent loss in its fiscal Q4.)
Despite that, analysts are overwhelmingly bullish. Over the past three months, 25 analysts have written notes about the company, and 24 of those have been calls to buy the stock – at an average price target of $192.33, implying roughly 18% price potential in the year ahead. Several of them have CRM as one of the best tech stocks to buy for 2020.
Among the bulls: Cowen's J. Derrick Wood, who calls the stock a "best idea for 2020" and an "attractive defensive growth investment" thanks in part to a good valuation; and Canaccord's Richard Davis, who says CRM is his "favorite large-cap core holding" given its top market share in several feature sets, as well as its sales and free-cash-flow growth.
Market value: $20.1 billion
Dividend yield: 1.5%
Skyworks Solutions (SWKS, $117.85) is a communications-technology company that's best known as a supplier of chips for the iPhone. It makes chip-based power amplifiers, front-end modules for handling radio frequencies and related products.
Interestingly, Apple and Skyworks performed similarly in 2019 – AAPL ripped off 78% gains and SWKS delivered 76% price returns with less than two weeks left in the year.
Bank of America analysts say Skyworks is a great way to play the growth of 5G communications technology. That's not just because of Apple, but because many previously inanimate devices, from traffic lights to medical devices, will soon get intelligence as part of the internet of things (IoT). This could let roads adjust automatically to changing traffic patterns or alert your doctor to blood pressure or sugar spikes.
Skyworks has consistently grown its revenue for years, and it has been consistently profitable – though the size of that profit has admittedly wavered for years. Still, the company is easily able to afford its dividend, which was initiated in 2014 at 11 cents quarterly and has quadrupled since then to 44 cents.
SWKS also is funneling cash back to shareholders via stock buybacks: The company initiated a new $2 billion share repurchase program in 2019 to replace an expiring $1 billion plan.
Market value: $23.4 billion
Splunk (SPLK, $150.14) produces software, with a web-based interface, for analyzing large amounts of data. Indeed, its brand message is "Turn Data Into Doing."
Splunk shares rose 43% through the vast majority of 2019 amid rapidly rising revenues – much of which it plowed back into the business, continuing its streak of generating considerable losses. But it is consistently cash-flow-positive – the company has generated $345.4 million in cash, after paying back debt, over the past four quarters.
SPLK was a roller-coaster ride throughout 2019, but it seemed poised to end on a high note thanks to a surge to record highs amid strong quarterly results released in late November. It also was helped by an Argus analyst note, in which Joseph Bonner wrote that its high annual recurring revenue makes it an attractive takeout target for several large firms. Indeed, a $23 billion market cap wouldn't deter many mega-cap tech stocks.
Goldman Sachs is bullish on SPLK stock, too. Christopher Merwin writes that he's encouraged by several developments, including a change in its revenue model that allows "customers that were previously wary of ballooning costs on Splunk to open up more data for use on the platform." He also noted Splunk's strong recurring sales.
Financial Profiles' Tricia Ross calls Splunk a "primary beneficiary of the artificial intelligence tailwind" that's impacting every industry. Its addressable market is growing as software is increasingly used to monitor IT operations, which in the cloud era now extend to the network's edge.
Market value: $2.3 billion
Synaptics' (SYNA, $68.65) rocky 2019 took a considerable turn for the better late in 2019, as a November earnings beat and rumors about an Apple win lifted the stock. Investors were poised to end 2019 with an 84% gain.
Synaptics makes computer interface products such as touchpads for laptops and fingerprint sensors for biometric security. Its equipment supports voice interfaces as well. This makes it not just a play on computers and phones, but on the coming IoT, in which every device around you becomes "smart."
SYNA shares jumped thanks to fiscal 2020 first-quarter earnings, reported Nov. 7. The company earned $1.22 per share, adjusted for certain items, that crushed expectations for 73 cents per share. That's encouraging, despite an 18.6% drop in revenues to $339.9 million.
The real excitement, however, stems from a possible contract with Apple. Susquehanna analyst Christopher Rolland said in mid-December that Broadcom's (AVGO) earnings report – which says it lost a custom product from its largest customer – implies that Synaptics might have won a contract with the iPhone maker. That said, Rosenblatt analyst Jun Zhang disagrees, saying that Samsung is the potential winner, not Synaptics.
Given that SYNA shares have appreciated somewhat on those Apple rumors adds some downside risk if Synaptics indeed hasn't won that contract. But Needham's Rajvindra Gill is optimistic about the company either way. Gill raised his price target to $80 (17% upside potential) on Dec. 20, after the company sold its mobile LCD TDDI business for $150 million – what Gill sees as a shift toward higher-margin products.
Market value: $300.6 billion
Dividend yield: 4.2%
Chipmaker Taiwan Semiconductor (TSM, $57.96) is one of the analyst community's favorite tech stocks to buy for 2020, as its manufacturing technology is seem as superior to that of long-dominant Intel (INTC). Its ability to perfect circuits as close as 7 nm has helped companies such as Nvidia and Advanced Micro Devices (AMD) power past Intel within various niches.
Taiwan Semiconductor also pays a generous dividend north of 4%. Cornerstone's Daniel Milan says this, as well as TSM's growth prospects, make the stock an attractive portfolio holding for 2020.
TSM has "the most leading-edge chip technology in the market," he says. "Demand is unprecedented. And management has affirmed its policy of distributing about 70% of its free cashflow as dividends going forward," meaning gains will flow through directly to shareholders.
Brian Bandsma, portfolio manager with Vontobel Quality Growth, says "all of today's technologies – autonomous vehicles, IoT, cloud computing, artificial intelligence, 5G services and blockchain – will need significant investment in more computing power." But the capital cost of producing those chips keeps going up, meaning there is less competition. Only Samsung can compete with Taiwan Semi's current fabrication technology, Bandsma says.
Wedbush's Gastwirth calls TSM his favorite way to invest in 5G technology. He believes that, starting in 2021, revenues will exceed Wall Street estimates; even those current models see the stock rising more than 40%.
Market value: $3.5 billion
Viavi Solutions (VIAV, $15.36) provides testing and monitoring solutions cover various types of communications networks, including broadband, Wi-Fi and fiber optic.
Viavi's revenue growth comes in chunks, and it wavers between profitability and losses. But it sells at a reasonable 19 times future earnings projections, and the coming wave of 5G networks should mean good things for demand of its core products.
Shares had gained 53% with just a couple weeks to go in 2019, and analysts still are expecting a 14% gain in 2020 that would double Kiplinger's outlook for the broader stock market. But 1035 Capital Management believes investors are still underestimating VIAV. The outfit writes that Viavi's 2018 acquisition of Cobham's Test and Measurement business is only now about to start paying off, in the form of better field-testing equipment. And the need for such gear will rise as 5G is deployed.
The analyst community has no doubts about their beliefs on the stock's general direction, however. Each of the six pros sounding off about the stock over the past quarter has called VIAV shares a Buy.