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2 top tech stocks to buy in 2022 and beyond


JThe market seems uncertain how to value tech stocks in 2022. Markets have seen heightened volatility, and it’s not uncommon to see our favorite tech names drop several percentage points one day, only to come back strong on next day.

This is partly due to the highest inflation in 40 years. The rate rose 8.5% in March from the previous year’s rate, largely due to food and gasoline costs. This has raised fears that an economic slowdown or even a recession could occur as the Federal Reserve hikes rates. Investors are understandably nervous.

There’s also plenty of good news if we know where to look. While the March inflation numbers were sour, there were some encouraging signs, such as falling used vehicle prices. Many tech companies are still posting record earnings, and the tepid market could be attractive for long-term investors.

1.Microsoft

Shares of Microsoft (NASDAQ: MSFT) have fallen more than 15% this year, and the stock is nearly 20% off its 52-week high. This is despite the company posting record results and releasing big news on the mergers and acquisitions (M&A) front. The stock is now trading at a price-to-earnings (P/E) ratio not seen since the market recovered from the March 2020 crash.

Microsoft posted strong results in the second quarter of fiscal 2022 (period ended December 31), with sales exceeding $51 billion. That equates to a 20% gain over the same period in fiscal 2021. Even better, operating profit grew 24% over the same period as the company continued to expand margins. The Microsoft Cloud was again a strong enabler, with a 32% increase in sales.

Microsoft trails only Amazon (NASDAQ: AMZN) cloud market share. The cloud offers a formidable lead, with the total market set to explode in the coming years. Microsoft is also a critical company when it comes to cybersecurity. The company recently reported that it was able to disrupt a group of Russian-backed hackers targeting Ukraine. Additionally, Microsoft launched a campaign at the end of 2021 to address the cybersecurity labor shortage in our country. Initiatives like this keep Microsoft at the forefront and ensure that the company remains a vital force in society – music to the ears of long-term investors.

Image source: Getty Images.

On the M&A front, Microsoft caused a stir when it announced the $69 billion investment ActivisionBlizzard (NASDAQ: ATVI) deal. This acquisition will make Microsoft the third-largest games company by sales, provided it removes regulatory hurdles. Gaming is the fastest growing form of entertainment, according to the company. This agreement consolidates Microsoft as a leader in the Three fast growing industries; gaming, cloud computing and cybersecurity.

2. Palo Alto Networks

Regarding cybersecurity, Palo Alto Networks (NASDAQ: PANW) continues to show excellent results in this crucial industry. Palo Alto is an industry leader in endpoint protection and network firewalls. The company continues to make waves in cloud security, including the recent announcement of the Palo Alto Network Cloud Next-Gen Firewall for Amazon Web Services. This comes amid the release of 22 major products in the first half of fiscal 2022.

Investors should also be pleased with Palo Alto’s growing revenue and impressive remaining performance obligation (RPO). Sales reached $1.3 billion in the second quarter of FY22 (period ended Jan. 31) on year-over-year growth of 30%. RPO, or revenue that will be recognized in future periods of ongoing contracts, swelled to $6.3 billion at the end of the second quarter of FY22. For perspective, the total market capitalization of the business is around $62 billion, less than 10 times the RPO.

Palo Alto is trading at a reasonable valuation, especially relative to other players in the industry. Newcomers like CrowdStrike (NASDAQ:CRWD) and Z-scale (NASDAQ: ZS) trade at price-to-sales (P/S) ratios well above 30. As shown below, even Fortinet (NASDAQ:FTNT) trades at a higher P/S ratio.

Table of PS PANW ratios

PS PANW ratio data by YCharts.

CrowdStrike and Zscaler are growing their sales faster than Palo Alto; it is a given. However, Palo Alto’s 30% growth is not to be overlooked. Palo Alto may be just the ticket for long-term investors looking for value in cybersecurity.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Bradley Guichard owns Amazon, CrowdStrike Holdings, Inc., Fortinet, Microsoft, Palo Alto Networks and Zscaler. The Motley Fool owns and endorses Activision Blizzard, Amazon, CrowdStrike Holdings, Inc., Microsoft, Palo Alto Networks, and Zscaler. The Motley Fool recommends Fortinet. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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