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.