Technology Sector’s ‘High Bar’
In an interview with CNBC on October 10, Drew Pettit, Director of US Equity Strategy at Citi Research, shared his thoughts about the upcoming earnings season and its potential impact on the market. With the Dow and S&P 500 reaching new closing highs, Pettit raised the question of whether earnings would justify the current valuations. The technology sector has been on a tear, with many software names running up significantly in recent weeks. However, Pettit’s warning suggests that investors should be cautious about getting too caught up in the hype. He noted that when there’s a high bar, investors should be prepared for potential disappointments.
Pettit sounded a note of caution when it came to the tech sector, particularly software stocks. He noted that software has the highest bar within tech, not just in terms of growth expectations but also in terms of monetization. Many software companies are not seeing the expected growth in the next three years, which is already priced into their valuations. This mismatch between expectations and reality could create volatility in the sector.
In terms of specific guidance, Pettit expects companies to use the current uncertainty as an excuse to walk down expectations for Q4. This is a typical trend in US markets, where companies tend to set low expectations and then beat them. Pettit advises investors to focus on companies that can deliver on their promises.
Overall, Pettit’s comments suggest that investors should be cautious about the tech sector, particularly software stocks, and focus on companies that can deliver on their promises. He also emphasizes the importance of looking beyond the current quarter and focusing on long-term growth prospects.
Tech Sector Will Thrive Despite Short-term Challenges
Dan Flax, Senior Research Analyst at Neuberger Berman is bullish on the technology sector, with a focus on companies that are well-positioned to capitalize on the next generation of workloads and are executing well on their product cycles. Flax expects concerns about cyclical headwinds to remain a factor but also sees select opportunities in the sector. He also noted that enterprise customers are looking to adjust to changes in the landscape cyclically and invest in transforming their organizations, which will drive technology spending in the second half of the decade.
As investors navigate the current market landscape, it is essential to approach the tech sector with a sense of caution. While the sector has been experiencing a significant upswing, investors should focus on companies that have a proven track record of delivering on their promises, rather than getting caught up in the hype surrounding certain stocks. With that in context, let’s take a look at the 8 most profitable tech stocks right now.
Our Methodology
To compile our list of the 8 most profitable tech stocks right now, we used the Finviz and Yahoo stock screeners to compile an initial list of the 40 largest technology companies by market cap. From that list, we narrowed our choices to companies with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds, as of Q2 of 2024.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Most Profitable Tech Stocks Right Now
8. Adobe (NASDAQ:ADBE)
Number of Hedge Fund Holders: 107
TTM Net Income: $5.36 Billion
5-Year Net Income CAGR: 14.05%
Adobe (NASDAQ:ADBE) is a leading software company best known for its creative tools such as Photoshop, Illustrator, and Premiere Pro, as well as its cloud-based software services such as Adobe Creative Cloud and Adobe Experience Cloud. The company’s software is used by professionals in various creative and marketing fields for design, video editing, and web development. Adobe (NASDAQ:ADBE) has a global client base, including industries ranging from media to finance and government.
In Q3, Adobe (NASDAQ:ADBE) reported revenues of $5.41 billion, representing 11% year-over-year growth. The company’s Digital Media segment, which includes Creative and Document businesses, drove this growth, with revenue increasing 11% year-over-year. Adobe’s (NASDAQ:ADBE) subscription-based business model continues to perform well, with total subscription revenues reaching $5.18 billion, representing 96% of total revenue. The company’s profitability also improved, with operating income increasing 17% year-over-year to $1.99 billion and net income increasing 20% year-over-year to $1.68 billion.
Adobe (NASDAQ:ADBE) has provided insight into its path toward AI profitability, specifically through the use of generative credits. These credits allow users to deploy AI-powered features, powered by Firefly, in Adobe’s applications and are consumed based on the computational cost and value of the feature used. While there are currently no caps on the number of generative credits, the company plans to institute caps as the adoption of Firefly accelerates, potentially leading to a new source of revenue growth. Adobe’s (NASDAQ:ADBE) AI tools have already led to increased demand for its products, and the introduction of generative credits could directly impact revenues and earnings. Additionally, the upcoming launch of Adobe’s generative AI video creation tool, Firefly Video Model, could also drive demand for generative credits and contribute to the company’s earnings growth.
Adobe’s (NASDAQ:ADBE) earnings are expected to surge by almost 21% in the current year. The stock has an average target price of $625.37, which implies a 21.57% upside potential from its current levels.
7. Advanced Micro Devices (NASDAQ:AMD)
Number of Hedge Fund Holders: 108
TTM Net Income: $1.35 Billion
5-Year Net Income CAGR: 47.95%
Advanced Micro Devices (NASDAQ:AMD) is a global semiconductor company that develops high-performance computing and graphics solutions. The company’s processors are widely used in consumer electronics, gaming consoles, and data centers. Its clients include tech giants such as Microsoft, Sony, and Hewlett-Packard.
Advanced Micro Devices (NASDAQ:AMD) has grown its market share significantly through advancements in processors for both consumer and enterprise applications. The company is a leader in the AI space, with a strong potential for growth its Instinct MI300 accelerator is designed to compete directly with Nvidia’s H100 AI chip, and AMD plans to release new AI chips annually to continue competing with industry leaders.
On August 19, 2024, Advanced Micro Devices (NASDAQ:AMD) announced that it has signed a definitive agreement to acquire ZT Systems, a leading provider of AI infrastructure for hyperscale computing companies, in a cash and stock transaction valued at $4.9 billion. The acquisition is expected to strengthen Advanced Micro Devices’ (NASDAQ:AMD) AI capabilities and provide industry-leading systems expertise to accelerate the deployment of optimized rack-scale solutions. ZT Systems’ extensive experience designing and optimizing cloud computing solutions will also help cloud and enterprise customers significantly accelerate the deployment of AMD-powered AI infrastructure at scale. The transaction is expected to be accretive by the end of 2025.
Advanced Micro Devices (NASDAQ:AMD) is a compelling investment opportunity in the AI space, with a strong potential for growth, the company’s leadership in AI-specific semiconductors, custom chip designs, and strong foothold in the AI ecosystem solidify its position as a key player in the industry, driving long-term growth and market leadership. The company’s earnings are expected to surge by 25.08% in the current year. Industry analysts have reached a consensus on the stock’s Buy rating, with an average target price of $187.07 that suggests a 13.03% upside potential from its current levels.
6. Salesforce (NYSE:CRM)
Number of Hedge Fund Holders: 117
TTM Net Income: $5.63 Billion
5-Year Net Income CAGR: 42.75%
Salesforce (NYSE:CRM) is a global leader in cloud-based Customer Relationship Management (CRM) software. The company provides businesses with a platform for marketing, sales, customer service, and commerce across various devices. Salesforce’s (NYSE:CRM) diverse client portfolio includes organizations in the healthcare, retail, and manufacturing sectors. The company supports enterprise digital transformations and has a strong international presence, serving clients in over 150 countries.
In Q2, Salesforce (NYSE:CRM) reported sales of $9.33 billion, up 8.4% year over year, and gross profits of $7.17 billion, up 10% year over year. Operating income reached $1.78 billion, up 21% year over year, with a margin of 19%.
On September 13, Salesforce (NYSE:CRM) announced the acquisition of Tenyx, a developer of AI-powered voice agents, to enhance its customer service capabilities. This strategic move is expected to expand the company’s autonomous agent capabilities for Service Agent by integrating Tenyx’s innovative voice AI solutions, ultimately delivering more intuitive and seamless customer interactions through AI-driven solutions. By combining Tenyx’s deep knowledge of voice AI with Salesforce Service Cloud, the company aims to set new standards in customer experience.
In July, Salesforce (NYSE:CRM) and Workday announced a strategic partnership to create a new AI-powered employee service agent that will automate tasks, provide personalized support, and surface data-driven insights to help employees work smarter and faster. The partnership will bring together the two companies’ platforms, datasets, and AI capabilities to deliver a seamless employee experience powered by generative AI. The partnership will also enable seamless integration between Workday and Slack, allowing employees to access and collaborate around financial and HR records directly in Slack.
Salesforce (NYSE:CRM) is a compelling investment opportunity, with strong growth prospects, and a new AI acquisition to boost future growth. The company’s earnings are projected to increase by 20.52% in the current year. Industry analysts are bullish and have a consensus Buy rating on the stock
5. Broadcom (NASDAQ:AVGO)
Number of Hedge Fund Holders: 130
TTM Net Income: $5.09 Billion
5-Year Net Income CAGR: 11.23%
Broadcom (NASDAQ:AVGO) is a global technology company that designs, develops, and supplies semiconductor and infrastructure software solutions. The company’s products include chips for networking, broadband, enterprise storage, and wireless communication. Broadcom (NASDAQ:AVGO) serves a wide range of industries, including telecommunications, data centers, and industrial sectors.
Broadcom (NASDAQ:AVGO) is well-positioned to capitalize on the growing demand for AI semiconductors. According to Precedence Research, the global artificial intelligence (AI) in semiconductor market size was $56.42 billion in 2024 and is expected to reach around $232.85 billion by 2034, expanding at a CAGR of 15.23%. Broadcom (NASDAQ:AVGO) has already secured major AI customers, including Google, Meta, and ByteDance, and is poised to add a fourth major customer, Microsoft’s OpenAI. Broadcom’s (NASDAQ:AVGO) AI-specific chip designs are tailored for customized workload demands which has enabled it to cater to the exact specifications required by hyperscale cloud providers.
Broadcom’s (NASDAQ:AVGO) AI-related revenues are on a steep growth trajectory, with estimated fiscal 2024 AI revenues of $12 billion and $16 billion in fiscal 2025, representing a 33% year-over-year growth rate. The company’s custom AI accelerators have seen a 3.5 times year-over-year growth, and its AI revenue contribution has increased from less than 5% of semiconductor solution revenues in fiscal 2019-2021 to 35% in fiscal 2024.
Broadcom’s (NASDAQ:AVGO) acquisition of VMware has yielded significant returns, with a 200% year-over-year increase in infrastructure software revenue and a $3.8 billion contribution from VMware in Q3. The integration of VMware into Broadcom’s (NASDAQ:AVGO) business has led to a 32% quarter-on-quarter increase in annualized booking value for VMware Cloud Foundation.
Broadcom (NASDAQ:AVGO) is well-positioned to dominate the AI semiconductor market, with a growing revenue contribution from AI. The company is expected to increase its earnings by 13.27% this year, its leadership in AI-specific semiconductors, custom chip designs, and strong foothold in the AI ecosystem solidify its position as a key player in the industry, driving long-term growth and market leadership.
4. Taiwan Semiconductor Manufacturing Company (NYSE:TSM)
Number of Hedge Fund Holders: 156
TTM Net Income: $29.90 Billion
5-Year Net Income CAGR: 22.90%
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the world’s largest independent semiconductor company which plays a critical role in the global tech supply chain by powering everything from smartphones to data centers. The company produces chips for many leading global companies, including Apple, AMD, and NVIDIA. Its cutting-edge technology, especially in advanced process nodes has solidified its role in high-performance computing and AI applications
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) has a market share of almost 30%. The company’s advanced 2nm, 3nm, 5nm, and 7nm technologies have enabled it to maintain its position as a top player in the industry. The company’s latest developments in 2nm and A16 process technologies are expected to further solidify its market leadership.
Its A16 manufacturing process, announced in April 2024, is best suited for high-performance computing with a complex signal route and dense power delivery network, with mass production scheduled for the second half of 2026. These advancements in 1.6nm and 2nm process technologies will provide a significant boost to the company’s growth, particularly in the AI and large machine learning tasks segment.
Taiwan Semiconductor Manufacturing Company’s (NYSE:TSM) 2nm (N2) process technology which offers a 10% to 15% speed improvement at the same power, or 25% to 30% power improvement at the same speed, and more than 15% chip density increase compared to 3 nm chips are expected to surpass both 3nm and 5nm sales in their respective initial two-year periods, with volume production on track for 2025.
Additionally, the company’s capacity utilization is expected to rise in the second half of FY24, driven by growing demands for sub-7nm process technologies. This improvement in utilization will benefit the company’s near-term growth and expand its gross margins.
Taiwan Semiconductor Manufacturing Company’s (NYSE:TSM) advancements in 1.6nm and 2nm process technologies give it a competitive edge. The company’s market leadership in the most advanced process technology below 7nm is expected to continue, analysts forecast the company to grow its earnings by 23.61% this year.
3. NVIDIA (NASDAQ:NVDA)
Number of Hedge Fund Holders: 179
TTM Net Income: $53.00 Billion
5-Year Net Income CAGR: 80.81%
NVIDIA (NASDAQ:NVDA) is a global leader in graphics processing units (GPUs) and has been at the forefront of AI, gaming, and data center technology. The company’s GPUs are widely used in gaming, deep learning, and high-performance computing. NVIDIA’s (NASDAQ:NVDA) AI and machine learning solutions have also been adopted across various industries such as healthcare, automotive, and finance. NVIDIA’s (NASDAQ:NVDA) customers include Amazon Web Services, Google Cloud, and Tesla.
NVIDIA (NASDAQ:NVDA) is poised for continued growth and success, driven by its strong position in the data center market and its upcoming Blackwell chip. Blackwell is high in demand from companies such as OpenAI, Microsoft, Meta, and other firms building AI data centers to power products. Blackwell is expected to cost between $30,000 and $40,000 per unit. The Blackwell GPUs are already being released to data centers and industrial customers for artificial intelligence applications and will be available for consumers in 2025.
In an interview with CNBC, CEO Jensen Huang said that “Blackwell is in full production and demand for Blackwell is insane” and that “Everybody wants to have the most and everybody wants to be first”. NVIDIA’s (NASDAQ:NVDA) leadership in the field of accelerated computing and generative AI is also a major driver of its growth prospects. Management has emphasized the importance of these two computing transitions, which are expected to drive long-term sustainability in capital expenditure spending.
Additionally, NVIDIA (NASDAQ:NVDA) has growing opportunities in the enterprise AI wave, automotive, and healthcare segments are expected to drive further growth, as the company’s products and solutions become increasingly adopted in these industries.
In Q2, global spending on cloud infrastructure grew 19% year over year to $78.2 billion, according to Canalys. Hyperscalers are expected to spend about $160 billion in 2024 on AI infrastructure. Analysts forecast the company’s earnings will increase by 81.88% this year and have a consensus Buy rating at a target price of $148.23, which implies a 9.48% increase from its current levels. With its strong position in the data center market and its growing opportunities in new industries, NVIDIA (NASDAQ:NVDA) is well-positioned to capitalize on these trends and drive further growth.
2. Apple (NASDAQ:AAPL)
Number of Hedge Fund Holders: 184
TTM Net Income: $101.95 Billion
5-Year Net Income CAGR: 12.85%
Apple (NASDAQ:AAPL) is one of the world’s largest technology companies, known for its iconic products such as the iPhone, iPad, Mac, and Apple Watch. Apple (NASDAQ:AAPL) continues to influence consumer electronics and technology industries globally. The company has a loyal customer base and innovative hardware-software integration makes it a leader in consumer technology.
Apple (NASDAQ:AAPL) has achieved remarkable success with its Vision Pro, capturing 57% of the total value in its category globally in Q1, despite only holding a 17% unit selling share.
On June 28, the Apple Vision Pro was launched in major Asian markets including China and Japan, as well as key Western countries such as Germany, France, and the UK in September, which will potentially boost the company’s market share.
Apple (NASDAQ:AAPL) has integrated various LLM models in its products that position it well in the AI competition and is a key driver of its success. By allowing users to select various LLM models, including ChatGPT, to utilize with Siri, Apple (NASDAQ:AAPL) can generate revenue from the LLM that comes preloaded on the devices.
This approach ensures that the company can benefit from the growing demand for AI applications without needing to develop the best model. Analysts expect the company to increase its earnings by 15.16% this year. Apple’s (NASDAQ:AAPL) innovative strategy, dominant position in the cloud and AI markets, and strong growth prospects make it an attractive investment opportunity.
1. Microsoft (NASDAQ:MSFT)
Number of Hedge Fund Holders: 279
TTM Net Income: $88.13 Billion
5-Year Net Income CAGR: 17.57%
Microsoft (NASDAQ:MSFT) is a technology giant offering a diverse range of products and services, including its Windows operating system, Office productivity suite, Azure cloud platform, and Xbox gaming console. Microsoft (NASDAQ:MSFT) is also a leader in AI, enterprise software, and cloud computing, with its Azure being a key growth driver.
Microsoft (NASDAQ:MSFT) is accelerating its data center capacity expansion plans and is poised to overcome capacity constraints for AI training and inferencing, due to its strategic partnerships with Oracle and other hyper scalers, In March, Microsoft (NASDAQ:MSFT) and Oracle announced to expand their partnership to meet the growing demand for Oracle Database Azure. The service will now be available in 15 regions globally, with 5 new regions added this year. Oracle Database Azure is now available in Germany and will allow customers to run Oracle database services on hardware in Azure data centers.
This collaboration helps Microsoft (NASDAQ:MSFT) offset some pressure while its investments in data centers, CPUs, and GPUs will support the growing demand for AI applications. In the financial year 2024, Microsoft (NASDAQ:MSFT) increased its capital investments by 58% to $44.5 billion. The company is well-positioned to capture the rapidly growing market for AI training and inferencing. Microsoft (NASDAQ:MSFT) plans to construct 20 data centers globally, in addition to its existing 300+ data center footprint spanning 60+ regions. This expansion will enable the company to increase its capacity and provide more efficient and scalable services to its customers.
Microsoft’s (NASDAQ:MSFT) dominant position in the cloud and AI and significant investments in data center expansion make it an attractive investment opportunity. The company’s earnings are projected to increase by 10.21% in the current year. With a consensus Buy rating from industry analysts, the stock has a target price of $495.97, which represents a 17.57% upside potential from its current level.
While we acknowledge the potential of Microsoft (NASDAQ:MSFT) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MSFT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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