The markets have clawed their way through a constant barrage of negative headlines. Inflation, higher interest rates, and declining consumer sentiment have caused anxiety on Wall Street, yet the tech-heavy Nasdaq Composite is up 35% so far in 2023.
Microsoft (MSFT -1.68%), Sony (SONY 0.06%), and Netflix (NFLX -0.22%)NFLX) all reported solid earnings results recently, which helped push their stock prices higher. Here’s why these three top tech stocks have more room to run.
Microsoft stock recently hit new highs following another great earnings report. The software leader reported double-digit top- and bottom-line growth in the most recent quarter, driven by its Office and cloud services segments. These segments were the first to take advantage of new artificial intelligence (AI) features that put Microsoft in a potentially lucrative position.
Microsoft recently introduced its AI-powered Copilot assistant to Windows 11, where it is already seeing accelerating deployments worldwide across several large companies. This should ultimately benefit its Office business, which posted a 15% year-over-year increase in revenue last quarter.
It’s also still early in the cloud computing market. Microsoft continues to gain share in this burgeoning opportunity, with Azure revenue up 29% in the quarter. AI services accounted for 3 percentage points of this growth.
AI could redefine Microsoft’s brand for a new generation of customers, which is a good reason to hold this top tech stock. The shares have more than tripled over the last five years but remain a relatively safe option for investors interested in the AI opportunity.
Sony is another top tech stock that is starting to pull out of its recent slump and could be a timely buy for 2024. It operates many businesses, ranging from financial services to consumer electronics, but strong growth in its largest business (gaming) is the reason to consider buying shares.
Sales of hardware and games drove a 32% year-over-year increase in Sony’s gaming business in the most recent quarter. The PlayStation network now has 107 million monthly active users, with PlayStation 5 (PS5) users now totaling 40% of the user base.
Sony expects to sell 25 million PS5 consoles in the current March-ending fiscal year. The momentum in recent console sales bodes well for Sony’s upcoming launch of new units that are smaller, lighter, and feature expanded storage capacity. With signs that the recent slowdown in game spending is turning the corner, the gaming business could have a strong year ahead as more players upgrade to the PS5.
Sony’s music business is also doing very well, with sales up 14% year over year last quarter. Sony is one of the big three music labels that continues to benefit from the shift to streaming services, which is a long-term growth opportunity.
Overall, analysts expect Sony’s total revenue to be flat this year, as other businesses like pictures and imaging solutions have not delivered consistent growth historically. But over the long term, the growth in gaming and music streaming are good reasons to hold the stock, which trades at a modest forward price-to-earnings ratio of 17.8, a discount to the market average of 25.
Netflix stock has been on a tear since hitting bottom over a year ago. It now has over 247 million subscribers, with subscriber growth accelerating each quarter this year. While the writers’ strike has delayed content production and created uncertainty for Netflix’s near-term growth, it’s also saving the company some money on production costs, as operating margin swelled to 22.4% in the third quarter.
The writers’ strike is now over, which has pushed the stock out of its recent slump. With writers and actors getting back to work, Netflix should be able to unleash more new content next year to satisfy subscribers and keep the momentum going.
Investors saw what new content can do to subscriber growth last year. In Q3 2022, Netflix returned to growth following two consecutive quarters of subscriber declines after launching Stranger Things Season Four and Monster: The Jeffrey Dahmer Story, among others.
Netflix said it plans to deliver substantial free cash flow in 2024, even after spending about $17 billion on production. It’s not only the leading streamer but the most profitable service. This is a good reason to buy and hold the stock for the long term.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft and Netflix. The Motley Fool has a disclosure policy.