Over the last five years, the S&P 500 is up an impressive 110%. But the S&P 500 Information Technology sector has more than doubled that performance, surging 257%. In fact, tech stocks have beat the market over the last one, three, five, and 10 years. So if your portfolio lacks exposure to this sector, it might be time to make a change.
With that in mind, we asked three Motley Fool contributors to pick tech stocks that look like smart buys in September. Keep reading to see why Amazon (NASDAQ:AMZN), Salesforce.com (NYSE:CRM), and Zoom Video Communications (NASDAQ:ZM) made the list.
A tech powerhouse in disguise
Eric Volkman (Amazon): Most consumers — and more than a few investors — view Amazon primarily as an e-commerce company. What they don’t realize is that it’s also quite a powerful IT stock that will only get stronger.
This is because of Amazon Web Services (AWS), its omnipresent cloud computing platform that is the provider of choice for a great many businesses. AWS is significant enough to be one of Amazon’s three reporting divisions (the other segments being North America and international retail).
Of the trio, AWS is by far the most profitable, with an operating margin of 31% in the second quarter, well outpacing the thin margins in the North American (4%) and international (2%) segments. AWS manages to do this even as it brings up the rear — at least for now — in terms of net sales. Its contribution accounted for a mere 10% of revenue during the most recent quarter.
Retail has historically been a low- to negative-margin business, so we shouldn’t be surprised by those single-digit numbers; although Amazon does an admirable job of harnessing technology to boost profitability. After all, price competition is always hanging over a retailer’s head, even for mighty Amazon. It’s also costly in terms of capital and resources to store, sell, and ship physical products to customers.
So for Amazon, the high-margin AWS is not only a powerful growth engine, it’s a key reason the company is profitable at all, and I see that dynamic continuing. Well-respected research company Gartner is predicting that global spend on cloud services will continue to grow, jumping 23% in 2021.
AWS is going to drink deep from that growth. Through the second quarter of 2021, AWS held 32% market share among cloud infrastructure providers, and Microsoft took second place with 19% market share, according to data from Canalys.
In short, investors are getting a nice two-for-one with Amazon stock. The company is both a best-in-class e-commerce play, and underneath all of those packages, a dominant force in the cloud computing industry.
The king of customer relationship management
Trevor Jennewine (Salesforce): Salesforce is the top dog in customer relationship management (CRM), holding more market share than the next four competitors combined. And over 150,000 companies rely on its Customer 360 platform, a broad portfolio of software designed to drive efficiency across sales, customer service, marketing, and commerce. The platform also leans on artificial intelligence to automate workflows, provide surface insights, and make recommendations.
Salesforce has many advantages, including its market-leading position and best-in-class CRM product, but one thing investors often overlook is the company’s management. CEO Mark Benioff started Salesforce in 1999, pioneering the concept of software-as-a-service, and his energetic enthusiasm has been critical to the company’s success. In fact, Glassdoor recently recognized Benioff as one of the top CEOs in the U.S., evidencing his high approval rating among employees.
Like many innovators, Benioff realized something before many of his peers: Cloud-based software is the future, and CRM is critical across virtually every industry. Today, digital transformation has made those insights more relevant. Consumers now have access to more options than ever before, and any company that doesn’t provide a top-notch digital experience is at a significant disadvantage.
As a result, Salesforce has seen strong demand for its CRM platform over the last three years.
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Recently, Salesforce completed its acquisition of Slack, a company that specializes in business communications. This move not only creates significant cross-sell opportunities, but it should also make the Customer 360 platform more useful. Nearly 90% of companies plan to blend remote and onsite work in the wake of the pandemic. And by putting Slack at the center of its software, Salesforce empowers clients to better connect with customers, partners, and business critical applications.
Here’s the bottom line: Salesforce is a founder-led business with a strong competitive position and a big market opportunity. Moreover, the company has delivered exceptional financial results over the long term — in fact, Salesforce is the fastest-growing enterprise software company in history. That’s why you should consider adding this tech stock to your portfolio.
Zoom out a bit
Jeremy Bowman (Zoom Video Communications): Zoom stock got whacked after the company reported second-quarter earnings at the end of August, falling 17% in the following session.
Despite the sell-off, the numbers looked great. Revenue rose 54% to $1.02 billion, Zoom’s first quarter topping the billion-dollar mark, which was slightly ahead of estimates at $991 million. Keep in mind that this quarter is the first to lap a full quarter during the pandemic, and revenue in the year-ago quarter jumped 355%. On a two-year basis, Zoom’s quarterly revenue jumped 600%.
Unlike most of its cloud stock peers, Zoom turned in another quarter of strong profits with adjusted operating margin of 41.6% and adjusted earnings per share of $1.36, up from $0.92 a year ago, and topping expectations at $1.16.
Zoom’s guidance seemed to be the culprit in the sell-off as the company called for revenue to be flat on a sequential basis, forecasting $1.015 billion-$1.02 billion, and saw adjusted earnings per share of $1.07-$1.08, even with results a year ago.
It’s natural for Zoom’s revenue growth to decelerate as it laps the breakout performance of 2020, but management’s guidance for the third quarter is likely conservative, and the company’s adjusted earnings per share could easily reach $5 this year. For that price, Zoom would be trading for a P/E ratio of less than 60, making it cheap by cloud stock standards.
Meanwhile, Zoom still has a bright future ahead as its customer base continues to expand and as the company introduces new products like Zoom Apps and Zoom Events, giving it more opportunities to monetize its current customer base.
With the stock trading down 50% from its peak and near 52-week lows, now seems like a great time to buy.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.