Tech's Biggest Winners...Still On Sale with Plenty of Upside

[Zacks | Our Research. Your Success.] WeekendWisdom Tactics that Work in Good Markets and Bad [Ben Rains - Editor] Tech's Biggest Winners . . . Still On Sale with Plenty of Upside By: Ben Rains July 1, 2023 --------------------------------------------------------------- Tons of investors are possibly kicking themselves for 'missing' out on the huge technology-driven rally in the first half of 2023. Thankfully, investors have time to get off the sidelines and start taking advantage of the stock market surge that appears to have plenty of gas left in the tank. Despite worrisome headlines comparing the current market to the Dot-com era, tons of fantastic technology stocks with proven histories and impressive outlooks are currently trading at very reasonable levels that investors with both near-term and long-term horizons can capitalize on. In fact, multiple tech giants look flat-out cheap right now on the valuation front, including a few of the biggest winners of 2023. Overall, the stock market is full of fantastic tech stocks trading at levels that might look like steals six months from now and six years down the road. It is also worth stressing that technology grows more essential by the day, helping fuel innovation and expansion across every part of the economy. And let's remember that the AI revolution, which will one day likely be valued in trillions of dollars, has barely begun. Today we fight back against the narrative that the technology sector is overheated by digging into some of the bullish numbers from valuations to growth outlooks and beyond. We then dive into three large-cap technology stocks that have helped lead the rally that still offer tons of upside and trade at valuation levels that investors might find highly enticing, even though they have all soared over 40% or higher during the first six months of 2023. Stay In the Game Economic forecasts and price targets are fluid, and nearly all of the major Wall Street players have raised their 2023 outlooks for the market and the economy. The first-half run should serve as a perfect example of why investors with long-term horizons are almost always best off staying constantly exposed to the market through thick and thin instead of trying to time the market perfectly. Think about all of the talking heads on TV, the big investment banks, and many others who were all calling for a recession in 2023 and a rough stock market at the start of the year. Tons of prominent voices remained bearish while the S&P 500 and the Nasdaq soared, driven by gains from Nvidia, Tesla, and others. Some bears still say that the earnings outlook doesn't support the current rally, while others will point to large economic unknowns in the U.S. and abroad. The Fed and inflation are the other two big points of bearish contention. Let's dispute some of these points right now. First, the forward-leaning world of Wall Street is always looking ahead to what's next. The stock market nearly always bottoms before earnings do, and investors priced in most of the earnings downturn in 2022. Plus, the earnings picture is holding up far better than the bears might think or suggest. The most recent Zacks data showcases that the Zacks Tech sector's outlook for 2023 earnings has actually started to improve since the start of April 2023, “reversing the trend that had been in place for the preceding year,” according to our Director of Research Sheraz Mian. [Zacks Rank #1 Stocks Performance Chart] Source: Zacks Investment Research The nearby charts highlight that S&P 500 earnings are projected to bottom in the second quarter (the one we are about to exit). Earnings growth is then expected to return in the fourth quarter, before it is projected to bounce back in a big way in 2024 and 2025. Current Zacks estimates call for S&P 500 earnings to climb by roughly 11% in both FY24 and FY25, following a -3.6% projected downturn in 2023. Meanwhile, the market appears to be extremely comfortable with the rate of cooling inflation and is happy enough with the Fed's response. Some are worried about a still-hawkish Jay Powell and Co. But the Fed is nearly done with their rate hiking efforts based on their own projections, and Wall Street is already pricing in an eventual Fed pivot. On top of that, it is worth remembering that Powell is not going to come out and say 'our job is done,' and will likely be the last to declare any type of official victory over inflation. Moving on, that major U.S. recession doesn't appear to be on the horizon at the moment with the unemployment rate near historic lows. Consumers are also still spending on luxuries such as travel. The most recent University of Michigan U.S. consumer sentiment survey reached its highest level in four months and easily topped Wall Street expectations. And even U.S. housing starts are rebounding. Not Overheated The S&P 500 and the Nasdaq have both cooled down a bit as we near the end of June. This should be viewed as healthy given the rapid surge the market experienced at various points in the first half, including the large rally between late May and the middle of June. The S&P 500 is currently up around 15% YTD, while trading about 10% below its all-time highs. Extending our view, the benchmark has surged over 40% in the last three years and over 60% during the last five years. Meanwhile, the Nasdaq has soared around 29% so far this year, yet it still trades 18% below its all-time highs. Expanding our timeline for the tech-heavy index highlights again why most investors should try to avoid market timing and stay exposed at all times through stocks and or ETFs. The Nasdaq is up 35% in the past three years and up 80% during the last five years. Both the S&P 500 and the Nasdaq also continue to trade above both their 50-day and 200-day moving averages. And the bulls came in to buy up stocks as soon as the Nasdaq hit its shorter 21-day moving average in the last week of June. [Nasdaq vs S&P 500 Price Return Performance Line Chart] Source: Zacks Research System On the valuation side, the S&P 500 trades at around 19.4X forward 12-month earnings. This marks a 20% discount to its highs over the last ten years and only a 12% premium compared to its own decade-long median. [S&P 500 P/E F12M Performance Line Chart] Source: Zacks Research System The stock market could experience more profit-taking to start July or down the road. And a tiny pullback in the near term is highly preferable if the alternative were to be an unchecked run to all-time highs only to see the market tumble. If stocks do fall to start the second half of 2023, some of the best-in-class tech names will be trading at even juicer valuation levels. Before we dive into the three soaring large-cap tech stocks that investors might want to buy in July, let's debunk one of the bigger myths about the biggest first-half winner. Nvidia has soared around 180% YTD to hit fresh highs, as part of a nearly 600% run in the past five years alone—with it up around 11,500% in the last 10 years. Many say that NVDA's valuation is now boiling hot. [NVIDIA vs Computer and Tech Market Performance Line Chart] Source: Zacks Research System But the chip stock's forward 12-month PEG ratio sits at 2.5 vs. the Zacks Tech Sector's 1.9. This marks a 24% discount compared to its own 10-year median and a 56% discount vs. its peaks. These levels certainly don't scream total market ecstasy. 3 Undervalued Tech Stocks Set to Outperform Big tech has been on a tear this year, leading some to believe the hefty gains have gone too far, too fast, and that they're overvalued. But some of tech's biggest winners are generating double-digit growth rates and record-high sales all while trading at valuations under their historical norms. Let's explore three big tech names that have helped lead the rally that still offer tons of upside. Stock #1: In our digitally connected and dependent world, this $56 billion market cap cybersecurity standout is vital to companies of all shapes and sizes across the entire economy. Shares have destroyed the Zacks Tech sector over the last decade, up 1,900% vs. 250%, including a 480% run over the past five years. Yet, it trades 70% below its all-time highs based on some valuation metrics. Stock #2: 2022 was a disappointing year for this social media titan, but its focus on core business and profits helped the stock post one of the best performances in the S&P 500 in 2023, with it up +130%. It is now being valued as a more mature, slower growth tech stock, with it at a nearly 20% discount to its decade-long median and 72% below its highs. Stock #3: This SaaS vanguard continues to flex its scale and strength within a business software market that grows more indispensable by the day. Shares have climbed +440% over the last 10 years, easily outpacing the Zacks tech sector's 250%. It has also skyrocketed around +55% YTD, yet it trades 10% below its average Zacks price target and roughly 30% below its 2021 peaks. [Click here for the names of these three stocks »]( But that's not all. You'll also get full 30-day, real-time access to ALL of Zacks' private buys & sells as part of our celebrated [Zacks Ultimate arrangement](. Don't miss your chance to follow our real-time moves from ready-to-fly stocks under $10 to professional options trades . . . from insider buys to long-term value stocks . . . from home run investments to income recommendations. In fact, Zacks Ultimate closed 176 double- and triple-digit gains last year and already 64 more in 2023. Gains reached as high as +244.0%, +348.7% and even +1,007.1%.¹ Your cost for all this is only $1, and there isn't one cent of obligation to spend anything more. Important: The number of investors who will see the undervalued tech stocks and many others must be limited. Your chance to take full advantage ends at midnight Sunday, July 2. 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