After the Federal Reserve turned hawkish, tech stocks had a horrendous run in 2022. Investors who tried buying dips were too early as stocks fell in the first three quarters. But, from the October 2022 lows, the technology sector has rebounded strongly. The Technology Select Sector SPDR ETF (NYSEARCA:XLK) is up 42% since then.
With these gains, investors must evaluate the attractiveness of the sector. Are there opportunities among tech stocks despite the impressive year-to-date returns of this sector? Yes, there are tech stocks to buy that offer upside from here.
Tech stocks have a proven higher earnings growth rate relative to the market. Most of the solutions provided by these companies (such as workflow automation) provide productivity gains to businesses. Thus, their earnings will hold up better than other sectors, even if we have a recession. Enterprises will continue to use technology to improve operations, reduce costs, and satisfy their customers.
However, after the recent run-up, only some tech companies are a buy. Investors would be prudent to consider expected earnings growth, profitability and current valuations before jumping into any name, no matter how fast the company is growing. This article discusses some of the best tech stocks to buy in July. The three companies identified below generated free cash flow and grew sales sequentially by over 10% in the last quarter. Also, these companies have solid earnings per share outlooks going forward.
Salesforce (CRM)
This customer relationship management software leader is a bargain, even after a 59% year-to-date rally. It’s surprising how fast the company’s fortunes have turned around after a brutal decline in 2022.
Salesforce’s (NASDAQ:CRM) revenue growth has never been in question. Through organic growth and acquisitions like Tableau and Slack, the company grew revenues at a 23.62% 5-year compounded annual growth rate. However, in 2022 as the Fed began rate hikes, investors started questioning its profitability.
Investors were no longer interested in revenue growth, instead demanding GAAP profits. Despite Salesforce’s revenue growth and solid number-one position in the CRM market, the company reported minimal profits. In contrast, peers like Adobe (NASDAQ:ADBE) showed strong free flow and GAAP profits. As the stock’s sell-off accelerated, activists led by Elliot Management swooped in.
So far, this activist pressure is paying off. Management is finally cutting costs and laying off employees. Additionally, it’s streamlining operations and imposing stricter performance standards on staff.
Due to these initiatives, profitability is improving. In the first quarter of fiscal year (FY) 2024, Salesforce’s GAAP operating margin improved to 5% from the previous year’s 0.3%. As Chief Financial Officer (CFO) Amy Weaver stated in the release, “Q1 represented another strong step forward as we accelerate our transformation and profitable growth strategy.”
While growth was slower than the company’s historical pace of more than 20%, it’s explainable considering Salesforce’s size and prevailing macro pressures. Indeed, 13% revenue growth in constant currency terms is nothing to scoff at.
Furthermore, management expects GAAP margins to increase to 11.4% for FY2024. At the same time, Salesforce is enhancing its CRM portfolio with trusted, secure generative AI. These AI innovations will fuel growth in the future. That’s why TipRanks analysts think CRM is one of the best tech stocks to buy, with an average $239 price target.
Splunk (SPLK)
Splunk (NASDAQ:SPLK) has been in the investor penalty box for a while. This security information and event management (SIEM) leader has had a tough transition from perpetual licensing to the cloud. These challenges explain why the stock is 50% below its August 2020 highs.
Despite these challenges, it has never been in question that SPLK stock offers tremendous value. Over the years, there have been numerous acquisition rumors. Its strengths in IT operations management (ITOM) and SIEM are unrivaled. According to Gartner, Splunk has been a leader in SIEM for nine consecutive years.
Its ITOM tools manage the provision, performance and availability of computing and networking resources. On the other hand, the company’s SIEM applications provide data-driven insights to businesses for threat detection, compliance, event analysis, incident investigation and real-time telemetry.
While its transition from licensing to a software-as-a-service subscription model has been slow, the company is now executing. With a new CEO and CFO, it is accelerating its transition, making it one of the tech stocks to buy.
In terms of performance, Q1 FY2024 results were stellar. Revenues came in at $751 million compared to $674 million in the same quarter last year. Cloud revenue increased 30% year-over-year to $419 million. Additionally, the firm demonstrated excellent operating leverage as free cash growth was 243% on a year-over-year basis.
Splunk’s outlook was also optimistic, with management expecting FY2024 revenues to be at the top of its guidance range. Also, management forecasts free cash flow to be between $805 million and $825 million. Per the company’s guidance, SPLK stock trades at 22-times forward free cash flow.
Given its leadership in SIEM and the ongoing success in its cloud transition, SPLK stock is one of the top tech stocks to buy for this year’s second half.
STMicroelectronics N.V. (STM)
STMicroelectronics N.V. (NYSE:STM) is a semiconductor company that supplies analog microcontrollers and digital ICs. While the company’s industrial segment faces some macro pressures, STM’s biggest growth driver is the automotive segment.
As internal combustion engines get replaced by electric vehicles, demand for Silicon Carbide (SiC) automobile chips is growing. These semiconductors have increased applications in cars.
Given the growth in SiC demand, STM is one of the best tech stocks to buy in July. It dominates the silicon carbide market, with over 40% market share.
The company has been winning deals to supply various automotive-related suppliers. To satisfy this demand, the company is expanding its capacity. They already have two fabs and two assembly plants. With production ramping up, management expects this segment’s sales to grow above $1.5 billion.
In Q1 2023, the company’s Automotive and Discrete Group (ADG) segment stood out, growing 43.9% year-over-year. Sequentially, revenue grew 6.5%, highlighting accelerating demand for vehicle electrification. STMicroelectronics has over 130 silicon carbide projects, with more than 60% related to automotive customers.
In terms of automotive outlook, the company had several design wins for silicon carbide power and silicon in automotive applications. As a result, management expects FY2023 silicon carbide revenues of about $1.2 billion.
The industrial segment also recorded strong growth driven by the digitization of systems and accelerating semi content. Also, the Microcontrollers and Digital ICs segment grew 13.2% year-over-year to $1.368 billion.
STM stock will ride secular trends such as vehicle electrification and digitization of power systems higher. Moreover, it trades at a bargain 12-times forward earnings. The market values it as essentially having no future growth potential, yet management expects about 5% to 10% revenue growth in FY2023.
On the date of publication, Charles Munyi did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.