Purse that keeps you up at night? Buy these top 3 tech stocks

After a strong recovery from the pandemic last year, the economy is slowing, inflation is still at decades-long highs and interest rates are rising. As a result, many stocks have been cut off this year. At the time of writing, the S&P 500 and Nasdaq composite have fallen by 10% and 17% respectively in 2022 so far.

However, the turmoil in the market should not keep you up at night. When the going gets tough, don’t be lazy. Invest in proven companies that are still growing at a healthy pace. Alphabet (GOOGL -0.44%) (GOOG -0.34%), Amazon (AMZN 0.44%)and Apple (AAPL 0.00%) are not the most exciting stocks these days, but these three top technology stocks are great buys right now. This is why.

1. Alphabet: Deep pockets are a safe haven in uncertain times

Let’s start our discussion of the tech titan enemies with Alphabet, the mother of the ubiquitous internet search engine Google. About 80% of Alphabet’s revenue is still tied to some form of advertising, and 70% of that advertising revenue comes specifically from Google search ads. Advertising is sensitive to macroeconomic health. In difficult times, many companies are cutting their marketing spend. So the market is concerned that Alphabet’s empire is headed for a decline if a recession hits this year or next.

But Alphabet has been through some recessions (2008 and 2020) and its search ads are flexible. Businesses can easily disable and re-enable these ads. If a recession does come, any decline in Alphabet ad spend would be very short-lived. And in the meantime, the company has proven its resilience, even in the face of a sharp economic slowdown. Google’s ad revenue grew 11.6% year over year in the second quarter of 2022 to $56.3 billion.

Digital advertising services are also very profitable, and Alphabet uses these margins to invest in new businesses (such as Google Cloud and self-driving car start-up Waymo) that have the potential to become big someday. But even after supporting these emerging segments, Alphabet still has room to return a lot of excess cash to shareholders. It repurchased $28.5 billion worth of its own stock in the first half of 2022 (1.9% of the company’s current enterprise value).

This return of cash provides a nice cushion for Alphabet’s shareholders in turbulent times, and there’s plenty of room for the company to continue to reward owners of its shares. The company had $125 billion in cash and short-term investments on its balance sheet (plus an additional $30.7 billion in long-term investments) at the end of June, offset by debt of just $14.7 billion. In terms of cash net of debt, that makes Alphabet not only the tech giant with the biggest pockets, but also one of the richest organizations in the world. Alphabet is a great buy right now to trade at 23 times the enterprise value at 12 months of lagging free cash flow.

2. Amazon: the cloud is an unstoppable force

After two decades of rapid growth, e-commerce is finally taking a breather. In the first two years of the pandemic, online shopping activity boomed. Now households are making more personal trips to the store again. That was not good news for Amazon. The company’s “product sales” segment declined 2% year-over-year through the first half of 2022, led by declines in its online store (and partially offset by healthy increases in brick-and-mortar stores, such as Whole Foods).

This major slowdown in e-commerce led to a massive drop in inventory earlier this year. At one point, Amazon dropped more than 40% from its all-time high in 2021. However, its shares are recovering, thanks in no small part to Amazon Web Services (AWS), the massive cloud computing segment. In fact, AWS has been one of the main reasons to invest in Amazon for several years now. Why? Because while AWS only accounted for a fraction of Amazon’s total revenue, it generates the bulk of the ecommerce leader’s operating profit. During the first half of this year, AWS only accounted for 16% of revenue, but it generated all of the total operating profit (while product sales generated an operating loss).

Granted, this doesn’t mean Amazon’s online sales juggernaut is worthless. Rather, shopping is a sticky experience that has led to other revenue lines for the company, such as the TV streaming service Prime Video or a fast-growing online advertising company that brought in nearly $8.8 billion in revenue in the second quarter of 2022 alone, an increase from 18% of the previous year.

Nevertheless, AWS is an incredible business model that has helped pioneer cloud computing in the first place, and it continues to expand rapidly. AWS revenue grew 33% in the second quarter. Cloud is rapidly catching up with traditional IT infrastructure in the wake of the pandemic and is expected to reach $1 trillion in annual spending by the end of this decade. AWS is at the forefront of this movement and should remain so for years to come. Amazon is currently in the red on a free cash flow basis as it spends money to support more cloud and other business growth. While the stock is still low, it’s far from over. Amazon will become profitable again at some point. The company also had $61 billion in cash and short-term investments, offset by $49 billion in debt, and currently has an enterprise value of $1.5 trillion. This rock solid company is a great buy right now after it has received more than its fair share of market penalties.

3. Apple: iPhone goes slow and steady to win the race

Apple fans, especially iPhone fans, are a unique group of consumers. While the global smartphone industry is poised for a major slump in the second half of this year (after a strong two-year run of 5G network device upgrades), Apple sees little disruption in iPhone demand right now. It’s a testament to how powerful the Apple brand is as iPhone adoption continues at a rapid pace, especially in emerging markets such as Indonesia, Vietnam, and India.

During the first three quarters of Apple’s fiscal year 2022 (fiscal year ends September 24), iPhone sales totaled $163 billion — an increase of 6.5% from last year. It’s a slow and steady pace compared to the past, but an impressive number nonetheless. The iPhone business is large enough to offset weakness in other areas (such as Mac and iPad sales) and is highly profitable. Apple used those margins (plus some cash from its balance sheet, which had $179 billion in cash and investments and $120 billion in debt) to return $28 billion to shareholders in the past quarter alone through dividends and share buybacks.

While Apple is no longer the fastest growing tech giant, there is much to appreciate about its scale. The company now has many hundreds of millions of actively used devices around the world and keeps tight control over its ecosystem of hardware and software. Thus, Apple can gradually release new features on iPhone to generate incremental revenue growth, mainly from the services segment. These services (such as the App Store and digital payments) generated revenue of $19.6 billion in the quarter, an increase of 12% year-over-year.

With sales of other devices losing steam this year, Apple is still continuing at a healthy pace. It’s proof that this $2.8 trillion enterprise giant still deserves a prominent place in investors’ portfolios. Apple stock is currently trading at 26 times the enterprise value at 12 months of trailing free cash flow. It’s a premium price tag, but worth every penny in uncertain times.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, serves on the board of directors for The Motley Fool. Suzanne Frey, an executive at Alphabet, serves on the board of directors of The Motley Fool. Nicholas Rossolillo and his clients have positions in Alphabet (C shares), Amazon and Apple. The Motley Fool holds positions in and recommends Alphabet (A shares), Alphabet (C shares), Amazon and Apple. The Motley Fool recommends the following options: Call $120 long on Apple in March 2023 and call $130 on Apple short in March 2023. The Motley Fool has a disclosure policy.


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