Tech stocks are back on the upswing.
It was a rough spring for the technology sector, as traders instead turned their attention to reopening stocks along with cryptocurrencies and meme plays. However, now crypto has plunged and reopening stocks are taking on water as well amid a surge in COVID-19 virus variants.
A recent Federal Reserve decision caused a big swing in interest rates, which has led to investors selling value stocks and buying growth stocks instead. As if that weren't enough, tech got another boost this week as a federal court blocked a key antitrust lawsuit against Facebook (ticker: FB). This has seemingly given the green light to other large tech companies to keep expanding their businesses as well. With all that in place, this is shaping up to be a good summer for tech stocks, including these five in particular:
— Facebook (FB)
— Alphabet (GOOG, GOOGL)
— Blackbaud (BLKB)
— Jack Henry (JKHY)
— Texas Instruments (TXN)
In late June, a federal court dismissed antitrust charges against Facebook. The Federal Trade Commission (FTC) had claimed that Facebook was acting as a monopoly in social media. The FTC, if it had its way, would have tried to force Facebook to divest its other pivotal holdings, including WhatsApp and Instagram, to create a more competitive social media landscape.
However, the federal court said the FTC failed to prove that Facebook was a monopoly. Facebook stock popped on the news and topped a $1 trillion valuation for the first time.
Arguably, however, the stock should be up a lot more. Shares are still trading for just 23 times forward earnings while analysts forecast nearly 20% annual revenue growth in 2022 and 2023. Now, with the threat of government intervention gone, Facebook is even more compelling.
Alphabet (GOOG, GOOGL)
The court's ruling has broader implications. While Facebook was the target in that case, it's no secret that regulators have been looking at most of the tech titans as potential monopolies, perhaps none more than Alphabet.
Google's search business has massive market share in online advertising. And the search business is hooked into its operating system and applications such as Gmail to extend its reach. Google's other ventures, such as self-driving car subsidiary Waymo, could extend Google's domain into next-generation technology as well.
In announcing a lawsuit against Alphabet last year, Texas' attorney general said that "if the free market were a baseball game, Google positioned itself as the pitcher, the batter and the umpire." Now, however, with Facebook clear of antitrust concerns, it sets a precedent for Google to avoid a major regulatory punishment as well.
Alphabet stock isn't as cheap as Facebook, but at 26 times forward earnings and approximately 15% projected annual revenue growth, it has earned its spot as one of the best tech stocks to buy now.
Blackbaud is a software company focused on charitable organization and K-12 schools. Its primary business is in providing software for charities to receive payments and manage their relationships with donors. The company estimates that 25% of charitable giving in 2020 occurred via Blackbaud's platform.
Charitable giving was disrupted in 2020 due to the pandemic, though some organizations saw an uptick in activity as people donated in the wake of the twin tragedies of the economic recession and health crisis. Still, 2020 wasn't a great year for Blackbaud. More broadly, Blackbaud has been in transition from on-premise software to a subscription cloud offering.
Such transitions in tech stocks are often met with stock price weakness as investors grapple with less upfront revenue from the subscription model. That creates opportunity now, however, to buy a leading niche software player at less than 26 times forward earnings with a reopening tailwind as charities can start having in-person events once again.
Jack Henry (JKHY)
Jack Henry is a leading payment processing and information technology company; its main clients are banks and credit unions. The company has an extremely stable business that barely missed a beat even during the financial crisis. Since then, Jack Henry stock has gone up more than 500% thanks to steady growth in the overall demand for payments and financial services.
That said, Jack Henry stock has gone flat as investors fret over the health of the banking and financial system in the COVID-19 era. More recently, it has become apparent that credit-quality concerns didn't end up causing much material harm to banks. As the economy is picking up in 2021, the banks are roaring back; financials have been one of the top-performing sectors this year.
With that risk now off the table, Jack Henry is primed to follow suit and blast off to new all-time highs. In addition, the company earns a significant chunk of high-margin business from mergers and acquisitions (M&A) activity in the banking sector. With bank stocks soaring, M&A is on the rise, and this should directly boost Jack Henry's earnings.
Texas Instruments (TXN)
Texas Instruments is the leader in analog semiconductor chips. This is a business that focuses on taking real-world parameters such as weather information and converting it into data for digital use. This line of chips is increasingly important as the Internet of Things grows and more devices than ever are online.
Texas Instruments is making a particularly big push in smart cars, and should sell a large chunk of the chipsets that end up going into autonomous vehicles. In late June, Texas Instruments also announced that it's buying a fabricating unit in Utah from Micron Technology ( MU) for $900 million as the company continues to execute on its growth plan.
Texas Instruments is benefiting from the current semiconductor shortage, which puts it in a good position for better pricing and profit margins going forward. The company has a prodigious growth record, having tripled its earnings per share over the past decade. Now, it trades for just 24 times forward earnings, which is quite reasonable in a bull market for the industry.