Technology stocks offer investors the promise of growth in ways that few other sectors can. After all, tech is synonymous with innovation that spawns new products, services, and features.
During the trailing one-year period, the Morningstar US Technology Index has returned 52.99%, while the Morningstar US Market Index has returned 33.31%.
The tech stocks that Morningstar covers look 8% overvalued as of March 18, 2024.
7 Best Tech Stocks to Buy Now
The stocks of these technology companies with Morningstar Economic Moat Ratings are the most reasonably priced according to our fair value estimates as of March 18, 2024.
- Sensata Technologies ST
- Smartsheet SMAR
- Lyft LYFT
- DocuSign DOCU
- Paycom Software PAYC
- Zoom Video Communications ZM
- Teradyne TER
Here’s a little more about each of the best technology stocks to buy, including commentary from the Morningstar analyst who covers the stock. All data is as of March 18, 2024.
Sensata Technologies
- Morningstar Price/Fair Value: 0.52
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Scientific & Technical Instruments
Sensata Technologies is the cheapest stock on our list of the best tech stocks to buy. The stock of this narrow-moat company from the scientific and technical instruments industry is trading 48% below our fair value estimate of $69.
We think Sensata Technologies is a differentiated supplier of sensors and electrical protection, predominantly for the automotive market. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity. Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. We think such outperformance is achievable over the next 10 years, given our expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles.
In our view, Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. We also think the mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of roughly three decades with its top 10 customers. As a result of switching costs and intangible assets, we believe Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years.
Over the next decade, we expect Sensata to focus on organic growth in electric vehicles and increasingly electrified industrial applications. The firm has historically been an active acquirer but is focusing on organic investment, reduced leverage, and increased shareholder returns in the medium term, of which we approve. The firm’s ability to grow content in electric vehicles and outperform underlying global automotive production are the primary drivers of our investment thesis.
Smartsheet
- Morningstar Price/Fair Value: 0.69
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Narrow-moat Smartsheet operates in the software application industry. This relatively cheap tech stock is 31% undervalued; we think the stock is worth $56.
Smartsheet is a leading provider of collaborative work management, or CWM, software-as-a-service solutions. The emerging SaaS niche aims to improve the efficiency and productivity of project and process management by displacing widely deployed but suboptimal incumbent tools of email and spreadsheets. Smartsheet’s platform allows nontechnical users to configure, automate, and visualize custom workflows and notifications, dynamically assign tasks and permission data access, and build centralized dashboards for real-time visibility, accountability, and consistency across projects. The platform leverages integrations to adjacent business applications and productivity tools to centralize data, reduce error-prone manual data entry, and improve process efficiency.
Smartsheet has leveraged a freemium go-to-market motion and heavy investment in product innovation and platform infrastructure to secure a solid footing in the sticky enterprise market. While multiple CWM vendors will likely capture share of the expansive addressable market for purpose-built project management tools, we believe Smartsheet is well-placed to rapidly expand within existing clients and become the enterprise, IT-certified vendor of choice. At present, sprawling enterprises likely engage multiple CWM solutions concurrently for siloed projects; however, we expect efforts to standardize internal processes and optimize project management will lead to provider consolidation over the long term. This dynamic will benefit providers like Smartsheet with the security, scalability, and compliance features enterprise clients demand.
We expect Smartsheet to win new clients and take greater share through free user conversion and module adoption, while embedding the platform further into mission-critical operations. We anticipate Smartsheet will continue with a successful playbook of growing seat expansion through the organic or assisted identification of new cases, and uptake of higher-margin capabilities. While over 30% of 2024 revenue was derived from add-on capabilities, less than 10% of the customer base had adopted these solutions, providing ample scope for further penetration.
Lyft
- Morningstar Price/Fair Value: 0.72
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Narrow-moat Lyft operates in the software application industry. This relatively cheap tech stock is 28% undervalued; we think the stock is worth $25.
In the US market, Lyft has emerged as the number-two ride-sharing player, a position we think it will keep for years to come. It is currently having difficulty maintaining its market share against the market leader, Uber, in pursuing riders in a highly lucrative addressable market (including taxis, ride-sharing, bikes, and scooters). In our view, Lyft warrants a narrow economic moat rating, thanks to the network effect around its ride-sharing platform and intangible assets associated with riders, rides, and mapping data, which we think can drive the firm to profitability and excess returns on invested capital.
From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation. It has tapped into the bike- and scooter-sharing markets, which we think will be worth over $12 billion by 2029, growing 7% annually. Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help the firm to expand its margins; without drivers, it could recognize a bigger chunk of the fare as net revenue. In contrast to Uber, Lyft is not focused on food transportation or logistics. We like Lyft's relatively narrower focus on consumer transportation but note that Uber has an edge over Lyft in terms of an earlier start, higher market share, and a stronger network effect around its services. In addition, unlike Uber, Lyft’s lack of revenue diversification won’t soften the impact of exogenous shocks like covid-19.
We believe Lyft may need to acquire riders more aggressively via lower pricing. However, we don’t think this is a death knell for future profitability. Compared with Uber, Lyft has fewer riders on its platform and fewer rides taken because it is focusing mainly on the US market; however, it may be able to avoid some bumps on the road toward GAAP profitability, including the international regulatory-related ones that may require additional costs.
DocuSign
- Morningstar Price/Fair Value: 0.73
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Top tech stock DocuSign looks 27% undervalued compared with our $80 fair value estimate. This software application company earns a narrow economic moat rating.
As the leader in electronic signatures and contract life cycle management software, we think DocuSign is well-positioned to capitalize on the evolving industry. We also see existing customers adopting more use cases and expanding seats over time, and also moving to the Agreement Cloud platform.
DocuSign’s vision is to modernize the contracting process by taking it from a disjointed and paper-based manual sequence of steps to an automated digital and collaborative system. We think the company has mastered the “sign” step of the process and has used it to build the Agreement Cloud around, but there’s more to DocuSign than just e-signatures. The Agreement Cloud is a platform that includes tools to help users prepare contracts using intuitive drag and drop forms, negotiate, e-sign using a variety of enhanced security and identification means, automate agreement workflows for satisfying contract elements post-execution, allow for payment collections, and centralize account management.
As use cases expand, we still expect the current primary driver of growth, the e-signature solution, to continue to grow rapidly thanks to the company’s entrenched leadership position and the more unpenetrated market. Underlying the larger picture is that the company still offers free trials and self-service for pain-free test drives. We already see strong adoption in the more than 1 million paid customers, with 88% involving a sales rep, and hundreds of customers already driving annual contract value in excess of $300,000 annually. In the meantime, net dollar retention rates were strong but have declined as the covid-19 lockdowns ended.
Based on a bottom-up analysis, management estimates that DocuSign has a total addressable market of $50 billion, half of which is e-signatures alone, while Agreement Cloud is the next largest piece, with other services making up a smaller opportunity. However, while we think the immediate market is smaller, the relative underpenetration, as evidenced by rapid growth from both DocuSign and its largest competitor, Adobe, makes this less relevant.
Paycom Software
- Morningstar Price/Fair Value: 0.74
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Paycom Software is 26% undervalued relative to our $260 fair value estimate. This top tech stock from the software application industry earns a narrow economic moat rating.
Paycom’s unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management, or HCM, solution. The company’s platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is squarely focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its self-service payroll module Better Employee Transaction Interface, or Beti.
We expect Paycom will continue to take market share of the growing payroll and HCM industry through industry consolidation and capitalizing on the shortfalls of competitors. The company has reported impressive growth to date, reflecting an ability to win clients and demonstrating how the cost and efficiency benefits of streamlining payroll and HCM solutions to a single platform can overcome inherent client switching costs.
We anticipate Paycom's average revenue per client, or ARPC, will increase at an average rate of 7% to 2028 due to a gradual shift upmarket and from taking greater share of wallet through upselling existing and new modules. Paycom's target market has shifted upward over several years, with the company formally lifting the upper bound to over 10,000 employees in fiscal 2023, from 2,000 in fiscal 2013. While we expect Paycom's average client size to increase, we expect its offering to be less appealing to mega enterprises that typically prefer to integrate best-of-breed solutions, in our view limiting the upmarket upside for Paycom.
Zoom Video Communications
- Morningstar Price/Fair Value: 0.74
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
This narrow-moat tech company operates in the software application industry. Zoom stock trades 26% below our fair value estimate of $89.
Zoom Video Communications’ mission is “to make video communications frictionless,” which it accomplishes with a unified, video-first communications platform that incorporates video, voice, chat, and content sharing. More recently, Zoom introduced a phone system and a contact center solution. The company offers a differentiated peer-to-peer technology, complete with proprietary routing technology. Zoom is a recognized market leader in meeting software and is disrupting and expanding the $100 billion market for collaboration software with its ease of use and superior user experience. We think the pandemic lockdowns demonstrated the strength of the solutions, which combined with an expanding portfolio help establish a narrow moat.
Zoom relies mainly on a low-touch e-commerce model that lends itself to viral adoption, but it has also established a direct salesforce to gather and serve larger, more strategic customers. The firm was in the right place at the right time during the covid-19 lockdowns and saw its user base explode. Outside of a broader portfolio, we see Zoom executing well so early in its lifecycle in a classic land-and-expand strategy. We like this approach because it offers the best of both worlds and should allow for penetration into the large enterprise accounts that drive revenue, as well as the ability to generate above-average margins. This is an opportunity for the company, which has also done an excellent job of balancing growth and margins. Growth has slowed after covid-19, even as margins have surged, so we think Zoom is well positioned to use cash flow generation to fund innovation and growth.
With the 2019 introduction of Zoom Phone, Zoom contact center, Zoom Apps, and OnZoom, the portfolio is expanding meaningfully. The company’s focus is squarely on adding as many users as possible. This starts with generating buzz and familiarity with free users while the direct salesforce sells to enterprise accounts. Last, customer count, deal size, and forward-looking metrics related to demand continue to expand.
Teradyne
- Morningstar Price/Fair Value: 0.76
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Wide
- Industry: Semiconductor Equipment & Materials
Rounding out our list of the best tech stocks to buy, wide-moat Teradyne is 24% undervalued. We think the stock of this semiconductor equipment and materials company is worth $135.
Teradyne is a heavyweight supplier of automated test equipment for semiconductors, boasting market-leading capabilities that run the gamut of chips. It is one of two companies worldwide that can produce testers for the most cutting-edge semiconductors, thanks to robust engineering talent across hardware and software and a structural lead in organic investment. The firm is a vital partner to chipmakers across the industry and has an impressively strong relationship with Apple and Taiwan Semiconductor. Teradyne’s market leadership exhibits itself in industry-leading margins, strong returns on invested capital, and a top market share. We give the firm a wide economic moat rating.
Beyond its top-tier capabilities, we think Teradyne is a strong operator. It appears to have found a good balance between organic investment in development and profitability, and it is a good generator of free cash flow despite its capital intensity. We approve of the firm’s use of extra cash for shareholder returns and opportunistic mergers and acquisitions, which have recently focused on the high-growth industrial automation market. We also applaud Teradyne’s strong balance sheet, which shows a net cash position.
We expect Teradyne to complement continued investment in chip testing with investment in the high-growth robotics market. We think the firm’s collaborative and autonomous robots will augment top-line growth over the next five years as well as be accretive to gross margins. In semiconductor testing, Teradyne will benefit from increasing complexity, specifically the expansion of 3D NAND memory capacity and advancements to new architectures and smaller geometries in digital chips, like 3-nanometer platforms and gate-all-around transistors. We also expect domestic onshoring and capacity expansion to generate demand for the firm’s automated test equipment in the medium term. We view Teradyne as an agnostic play on the global chipmaking market with muted cyclicality arising from its vital role in the supply chain and nature as a capital expense for customers.
5 Stocks to Buy When the Market Falls
How to Find More of the Best Technology Stocks to Buy
Investors who would like to extend their search for the best tech stocks can do the following:
- Review Morningstar’s comprehensive list of technology stocks to investigate further.
- Use the Morningstar Investor screener to build a shortlist of technology stocks to research and watch.
- Read the latest news about notable technology stocks from Morningstar technology analyst Dan Romanoff.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
