Stocks made a bit of a comeback through early afternoon trading Thursday, after the Dow, Nasdaq, and S&P 500 all fell well over 3% on Wednesday. The fall followed heightened fears about the rise of coronavirus cases in Europe and the U.S. that have brought about the possibility of the return of broader lockdown measures.
Along with the unknowns on the virus front, the uncertainty surrounding the election seemingly grows as we inch closer to November 3. Perhaps more importantly, Wall Street is worried about the timeline on the long-awaited second stimulus bill.
All of this has partially offset the fact that the S&P 500 earnings picture contiues to get better, especially outside of the social distancing impacted industries such as travel and hospitality. And new data Thursday showed that the U.S. economy grew at a record pace in the third quarter, up 7.4% over Q2 and at a 33.1% annual rate (also read: Will Rising Infections Derail Improving Earnings).
All of that said, Wall Street analysts overall seem confident about the market beyond the near-term, no matter who is in power in Washington. Investors with a longer-term horizon need to remember that the ebbs and flows of the market are normal. In fact, there have been 24 market corrections since November 1974—five of which turned into bear markets, including the coronavirus selloff.
Let’s also remind ourselves that the two key factors that drive stocks, earnings and interest rates, are still flashing bullish signals. Plus, timing the market is extremely difficult and can cause investors to miss out on big gains, or buy high and sell low.
So let’s dive into three large-cap technology stocks that are poised to grow for years to come…
Microsoft’s cloud computing expansion proved once again to be its most important bet in years when it topped Q1 FY21 estimates on Tuesday. MSFT’s adjusted earnings surged 32%, with sales up 12%. The company’s Intelligent Cloud united jumped 20% to $13 billion, which made it the biggest top-line contributor of its three core spaces. MSFT’s Azure-driven cloud business is thriving alongside Amazon AMZN. Plus, its Office offerings remain nearly as vital as ever. This helped its Productivity and Business Processes space, which includes LinkedIn and more, climb 11% in Q1.
Microsoft’s cloud efforts are now a part of nearly every facet of the company. Meanwhile, its Xbox content and services revenue surged 30% last quarter. And its portfolio of remote work offerings helps it compete against Zoom Video ZM and others. The company’s EPS outlook has improved since its recent report to help it land a Zacks Rank #2 (Buy). Looking ahead, Zacks estimates project MSFT’s full-year revenue will climb roughly 10% in both FY21 and FY22, with its adjusted earnings expected to jump 14% and 11%, respectively.
Microsoft’s projected top-line growth would follow three straight years of between 13% to 15% revenue expansion, which is highly impressive for a firm of its size and age. Meanwhile, it holds around $137 billion in cash and equivalents to help it make more acquisitions and return value to shareholders. MSFT is up 40% in the last year and 145% in past three to nearly match Apple AAPL and top Netflix NFLX. The company’s 1.10% dividend yield beats the 10-year U.S. Treasury’s 0.80%, and MSFT stock sits 10% below its early September highs. And it is poised to play a key role in the constant digitalization of business and beyond.
Adobe beat Q3 estimates in mid-September, with revenue up 14% for the second quarter in a row, while its adjusted earnings climbed 25%. The firm’s ability to grow during these rough economic conditions shows how important its offerings are to its customers and highlights the strength of the broader cloud software model. Adobe’s suite of subscription-based creative and design software from Photoshop to Illustrator are often regarded as nearly irreplaceable by many individuals, businesses, and schools.
ADBE’s Creative Cloud offerings can be viewed in a similar light to Microsoft’s Office suite, which helps provide a solid moat. ADBE has also expanded its business-focused platforms and solutions for marketing and commerce in recent years, while its PDF and e-signature units remain important. ADBE has expanded its full-year sales by over 22% in each of the past four years, with 15% growth in FY15.
Moving on, Zacks estimates call for the company’s FY20 revenue to pop 14.5% to come in at $12.79 billion, with FY21 expected to climb another 15.3% higher. This would stretch its streak of double-digit sales growth to seven years. The creative software firm’s adjusted earnings are projected to jump 26% and 12%, respectively over this same stretch.
Adobe earns a Zacks Rank #3 (Hold) at the moment, alongside its “B” for Growth and an “A” for Momentum in our Style Scores system. The cloud software firm continued to buy back shares last quarter and its shares are up 65% in the last 12 months. And it might surprise some investors to know that Adobe topped all of the so-called FAANG stocks over the last five years, up 420%.
Nvidia has transformed from a GPU power for gaming into a chip titan within data centers, cloud computing, and artificial intelligence. NVDA made a splash in September when it announced its acquisition of Arm Limited from Softbank for $40 billion, most of which will be paid in stock.
Arm is one of the most important behind-the-scenes companies in the market. It designs and licenses the basic blueprints of chips that consume the least amount of energy, which are used in roughly 90% of the world's smartphones. Yet, the biggest chip deal in history faces a tough regulatory approval process in the U.S., China, and the U.K.
Even if NVDA’s Arm deal doesn’t go through, it is still well-positioned for the future. Its sales soared 50% in Q2 FY21, driven by a 167% jump in data center revenue. This topped Q1 and Q4 FY20’s 40% sales growth and our estimates call for its Q3 sales to jump 47% and Q4 to surge 44%. At the same time, its adjusted EPS figures are projected to climb 44% and 36%, respectively. Longer-term, the company’s FY21 revenue is projected to climb 45%, with FY22 expected to come in another 18% higher. Meanwhile, its adjusted EPS is expected to surge 58% this year and another 21% next year.
Nvidia, which is a Zacks Rank #2 (Buy) at the moment, has seen its shares skyrocket 160% in the last year. This is part of a much larger and longer run. Overall, the stock appears to be worth considering as a longer-term growth play for gaming, cloud computing, AI, and more. And NVDA shares rest about 10% off their highs, with the company set to release its Q3 results on November 18.
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