Technology stocks endured a brutal 2022. The Morningstar US Technology Index finished the year down more than 31%. But the tables turned in the new year. In the first quarter of 2023, tech stocks rallied, rising 22%.
Can the tech stock rally continue? Maybe, or maybe not. We’re still seeing weak demand for PCs and Android-based smartphones, and software revenue growth has been slowing. Morningstar expects the economy overall to weaken in the second and third quarters this year. As a result, we think volatility will persist over the near term.
Longer term, however, we’re confident in secular tailwinds in the tech sector, such as cloud computing and rising semiconductor demand. For patient investors who can ride out volatility, here are three undervalued tech stocks to consider:
3 Top Tech Stocks to Buy and Hold in 2023
First up is ASML Holding. ASML is one of our top picks in the semiconductor industry. The company is the predominant supplier of photolithography equipment for semiconductor manufacturers. We expect it to benefit from the proliferation of extreme ultraviolet lithography at leading-edge chipmakers. In fact, we expect ASML to outgrow the wafer fabrication equipment industry in the coming years, as process technology leaders buy its tools. We assign ASML a wide economic moat rating and think shares are worth US$760.
Next is Salesforce. Our analysts think Salesforce represents one of the best long-term growth stories in large-cap software, thanks to the company’s expanding portfolio of complementary solutions that allows clients to completely embrace their customers and build relationships, strengthen retention, and drive revenue. We expect Salesforce to benefit even more from natural cross-selling among its clouds, upselling more robust features within product lines, pricing actions, international growth, and continued acquisitions such as the recent deals for Slack and Tableau. We assign Salesforce a wide economic moat rating and think shares are worth US$245.
Lastly, there’s ServiceNow. ServiceNow has mastered what’s called the “land and expand” strategy by leveraging its strength in workflow automation to deepen its relationship with clients with additional IT, HR, customer service, and other back-office products. In fact, we think ServiceNow has become a key partner in digital transformation, given its elite retention statistics. We’re also impressed with ServiceNow’s excellent balance between strong and highly visible revenue growth and robust margins. We assign ServiceNow a wide economic moat rating, and we think shares are worth US$600.
Morningstar sector director Brian Colello, strategist Abhinav Davuluri, and senior analyst Dan Romanoff provided the research behind this segment.
