Big Tech stocks are having an amazing run this year. Year to date, the four biggest US tech companies have all produced double-digit returns. By contrast, the FTSE 100 has only risen about 4%, which shows the benefits of diversifying a portfolio geographically.
Is it too late to jump aboard the Big Tech train now? I don’t think so. However, I believe investors need to be a little selective after the recent gains. With that in mind, here are the Big Tech stocks I see as the best buys today.
Attractive valuation
My top pick right now is Alphabet (NASDAQ: GOOG), the owner of Google and YouTube.
One reason I’m bullish here is the stock is still well off its highs. As a result, it has a relatively low valuation.
Currently, the company’s forward-looking price-to-earnings (P/E) ratio is 19.8. That’s much lower than the P/E ratios of the other three companies. And I see the multiple as very reasonable, given the company’s strong brands and long-term growth potential.
| Stock | Forward-looking P/E ratio |
| Apple | 27.9 |
| Microsoft | 31.5 |
| Alphabet | 19.8 |
| Amazon | 66.7 |
Looking ahead, one thing that could help drive growth for Alphabet is the roll out of new artificial intelligence (AI) features across its search platform. These should enhance user experience and lead to higher revenues in the long run.
Another growth driver is cloud computing. Alphabet is currently the third largest global provider, and this side of the business is growing rapidly. In Q1 for example, revenues rose 28% year on year.
Looking beyond the growth, I like the fact the company is buying back its own shares (it announced a $70bn buyback last month) and cutting costs. These initiatives should help boost earnings per share over time.
As for the risks, the big one here is competition from Microsoft. Its search platform, Bing, is gaining market share, thanks to new AI features. This is something to keep an eye on.
I think the overall risk/reward setup here is favourable however.
Still 40% off its highs
The other Big Tech stock I’d buy is Amazon (NASDAQ: AMZN), a major player in both e-commerce and cloud computing.
Right now, Amazon stock is more than 40% off its all-time highs. And I see this is an opportunity.
Yes, it’s still expensive. However, this stock has always been expensive. In the past, it has often had a three-digit P/E ratio.
Ignoring the stock because of its sky-high valuation would have backfired though. If I had invested in Amazon a decade ago, I would have made roughly eight times my money by now, even after the recent 40%+ share price fall.
Like Alphabet, Amazon looks set to generate growth in the years ahead from cloud computing. Growth from this division has slowed recently. However, I suspect this is a temporary slowdown due to weak economic conditions. I expect it to re-accelerate in the near future.
Another area of growth for Amazon is digital advertising. For Q1, sales growth here was 23%. That’s impressive in the current environment.
Of course, the high valuation does add risk. If results fall short of the market’s expectations, the stock will fall.
Taking a long-term view however, I think buying now is likely to pay off.
