Why Google and Amazon Top the List of the 6 Best Tech Stocks to Buy
At Warren Buffett’s annual Berkshire Hathaway (BRK-A) shareholders meeting in early May, the investor wistfully expressed his regret for missing out on the booming growth of America’s biggest companies, particularly Google and Amazon. But top tech investors have a message for Buffett and others: It’s not too late.
Google’s parent, Alphabet (GOOGL), is now the second-largest company in the S&P 500 (by market capitalization) after Apple (AAPL), followed by Microsoft (MSFT), Amazon (AMZN), and Facebook (FB), with a combined value approaching $3 trillion. Even Buffett marveled at how their business models, built on intellectual property rather than tangible assets, are “so much better” than the industrial core of yesteryear’s biggest companies.
Artificial intelligence—whether in self-driving cars, helpful household robots, or software that takes dictation flawlessly and then translates it into another language—is the IP making the most waves in technology right now. And many investors see Google as AI’s dominant force. “We look at Google’s AlphaGo victory as more important than the moon landing,” says Gavin Baker, manager of the $14.8 billion Fidelity OTC Portfolio, which invests largely in high-growth Nasdaq stocks and other tech firms. (AlphaGo is a “deep learning” computer program that prevailed last year over the world champion of the board game Go.) Even after Alphabet’s more than $100 billion market gain this year alone, the company trades at just 23 times expected 2017 earnings, compared with about 18.5 times for the S&P 500, and is growing much faster.
The big tech companies’ vast computing power makes it hard for others to challenge their dominance. Exhibit A of that phenomenon may be Amazon, which has seemed to have an electric fence repelling those who would go toe-to-toe with it. What’s more, “it doesn’t just have one business addressing a $1 trillion market opportunity, it has two,” says Ken Allen, manager of the T. Rowe Price Science & Technology Fund—its e-commerce business, and the cloud-computing services it sells to other companies. Allen thinks Amazon, now worth about $460 billion, will be “the first to [reach] $1 trillion in market cap.”
Another company likely to reap profits from the cloud, says Susan Hirsch, who manages the $4.3 billion TIAA-CREF Large-Cap Growth Fund: Adobe (ADBE). The Photoshop maker’s growth has accelerated since it switched to a cloud subscription model, and its revenue is expected to increase more than 20% this year.
It’s hard to predict who will be the first winner in driverless cars, the barely-past-imaginary industry that companies from Google to Ford are sprinting toward like predators. Baker invests in Tesla (TSLA) as well as Uber, one of several private companies that make up 3% of his fund. “I think my [future] grandchildren will find it deeply strange that human beings will be allowed to drive,” he says. Hirsch thinks Tesla could displace much of the traditional car industry by offering greater value and performance as technology costs come down. Still she acknowledges the risks of investing in Elon Musk’s as yet unprofitable company, and she keeps her stake relatively small: “It’s not a big bet, because it would give me an ulcer.”
For a tech play that’s less likely to upset their stomachs, many investors like semiconductor companies such as Nvidia (NVDA), whose chips are used in Tesla and other autonomous driving systems, smartphones, and more. Chipmakers are already among the market’s best performers this year, but Ankur Crawford of the Alger Spectra Fund thinks Broadcom (AVGO), at less than 16 times 2017 earnings, looks undervalued following its merger with Avago. The company supplies semiconductors for both Apple iPhones and Samsung Galaxys, along with a host of Internet-of-things products. “It’s levered to all the right stuff,” she says.
This article is part of Fortune’s 2017 Midyear Investor’s Guide feature. For our picks in other sectors, click on the links below:
- Why Apple Is One of the 5 Best Dividend Stocks to Buy Now
- How to Invest In Bonds Even if Interest Rates Rise
- The 5 Best Stocks and ETFs to Invest in China and India Now
- The 3 Best Oil Stocks to Buy Right Now—Even if Energy Prices Fall
- The 3 Best Bank Stocks to Buy Now—Whether Tax Reform Happens or Not
This article appears as part of the Midyear Investor’s Guide package in the June 1, 2017 issue of Fortune.