As 2024 comes to a close, many investors are looking at their portfolios and trying to decide if they need to make any adjustments. Some may be coming to the conclusion that they need more exposure to the technology sector — a natural idea given the impressive performances of some of the key names in it.
Just look at Alphabet (GOOGL -1.11%) (GOOG -1.16%) and Meta Platforms (META -1.65%). These two dominant internet firms have crushed the S&P 500 in the past five- and 10-year periods. Their track records are hard to argue with.
Here’s why I believe these “Magnificent Seven” stocks are still the two best tech businesses to buy in the month of December.
Network effects
Alphabet and Meta have achieved trillion-dollar-plus market caps thanks to their wide economic moats. There might be no greater contributing factor to their success than network effects.
Alphabet’s Google Search, which has a 90% market share globally and brings in 56% of total company revenue, becomes more useful and powerful as internet usage rises. Growth in the number of users, website publishers, and advertisers creates a positive feedback loop for Google that makes it difficult for rivals to scale up.
Meta’s family of social media apps, which combined have a whopping 3.29 billion daily active users, also benefits from network effects. People want to use these services because so many people they know are on them. If an entrepreneur with unlimited access to capital tried to launch a new social media platform from scratch, it wouldn’t hold a candle to Facebook, for instance. Attracting people to a platform when it has few existing users is a daunting task.
Beyond network effects, these businesses also possess powerful data advantages. Given their incredible reach, there might be no two companies that are able to collect data the way Alphabet and Meta can. This allows them to glean valuable insights about their users and their behavior, which only reinforces how management directs strategic moves. At the end of the day, it makes Alphabet and Meta that much more indestructible from a competitive standpoint.
Financial prowess
Generating outsized profits is no problem for either of these companies. Alphabet’s operating margin was 32% in Q3, while Meta’s was 43%. Running a scaled internet-enabled company is clearly a lucrative activity that results in a large portion of revenue making it to the bottom line on a consistent basis.
These businesses have pristine balance sheets with sizable net cash positions, so neither Alphabet nor Meta will ever have to raise capital at inopportune times. And that means these companies can continue distributing a lot of their earnings to investors in the form of dividends and share repurchases.
Operating from positions of financial strength also allows them to invest aggressively in new initiatives. Recently, both have focused on expanding their artificial intelligence (AI) capabilities, whether by launching new features to users or advertisers or boosting computing capacity. In AI, they are in favorable positions to remain ahead of the curve.
Current valuations
Of course, no company is a good buy when its valuation is excessive. Luckily, that’s not the case here. In fact, their valuations are quite reasonable.
Alphabet trades at a forward P/E ratio of 23.1. Meta shares can be purchased at a forward P/E multiple of 27.4. Both are lower than the 28.3 forward ratio that the tech-heavy Nasdaq-100 index carries right now. As such, these appear to be compelling entry points for new investors.
That’s especially true when you consider their growth outlooks. According to analysts’ consensus estimates, Alphabet and Meta are expected to increase their earnings per share at annualized rates of 20.5% and 24.7%, respectively, between 2023 and 2026. Viewed in this light, their valuations offer another no-brainer reason to buy these two tech stocks in December.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
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