What Are the Best Technology Stocks for Long Term Investors?

Technology StockThe Best Technology Stocks Offer Steady Gains

There are very few long-term investors left on the market. Most people just want to get rich overnight. They aren’t willing to play the long game, sacrifice, or realize that wealth takes time.

But, for the more patient of our readers, I have compiled a list of the best technology stocks for long term investors. It’s not a comprehensive list, but it’s got some gems.

If you panic when your trading screen goes red, then perhaps active trading is not for you. Try high dividend technology stocks that offer a slow and steady return. Not everyone is comfortable with risk. Not every investor needs to be trading tech penny stocks for a living.

You can make enormous money from dividends and share buybacks. But the best tech stocks for long term investors can still offer impressive gains, albeit over an extended time frame.

Although these returns may appear painfully slow at first, massive returns are still within reach (thanks to the magic of compound interest)! All we need to do is identify which tech stocks are likely to survive the next five years, 10 years, 20 years…

Thirty years ago, your money was safe in General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), and Fiat Chrysler Automobiles NV (NYSE:FCAU). Those carmakers had 1.2 million employees and $250.0 billion in combined revenue. They were the “Pillars of American Commerce,” or “PAC Stocks,” as I like to call them.

Before them, it was the railways. And before that, it was merchant ships that transported goods across the Atlantic. On and on it goes. In every generation, there is one sector that powers the growth of the U.S. economy. Right now, technology stocks are the PAC Stocks.

If there was any doubt, the chart below should dispel it immediately:

NDX

Chart courtesy of StockCharts.com

Over the last 15 years, the NASDAQ 100 Composite Index (an index laden with tech stocks) vastly outperformed both the S&P 500 Index and the Dow Jones Industrial Average (DJIA).

It isn’t even close—tech dominates the gains made on the stock market! This isn’t a coincidence, nor is it a matter of chance. Tech stocks for long term investors are the only possible endgame because they push society forward through innovation and creative output.

I believe there is no other eventuality. As such, the only thing left for us to do is decide which tech companies are likely to survive the next decade. There are so many to choose from.

How to Find the Best Tech Stocks for Long Term Investors

From Apple Inc. (NASDAQ:AAPL) to Zendesk Inc (NYSE:ZEN), there are literally hundreds of choices. My approach is to look for companies that offer solid cash flow, strong business fundamentals, and an openness to new technology. In other words, these companies should be able to deliver steady returns to investors.

At the same time, these companies need protection against young sharks. Every entrepreneur in Silicon Valley dreams of starting the next Uber Technologies, Inc. or Airbnb, Inc., of “disrupting” a suboptimal business model. Both companies flipped old industries (taxis and hotels, respectively) on their heads.

Are these PAC stocks protected from such disruption? It’s a tough question to answer, but not impossible. I use three indicators to make my decision:

  1. Current Ratio
  2. Operating Cash Flow
  3. X Factor

Of course, high dividend technology stocks automatically put themselves up for consideration, but these three metrics are just as important.

1. The Current Ratio

The current ratio shows us whether or not the company has a strong financial position. It measures the firm’s ability to pay down debt (by comparing assets to liabilities). You typically want to see this number recorded between one and five.

While this ratio is very useful, it has limitations. After all, it only shows you a snapshot of a company’s financial position. It is frozen in time. Investing, on the other hand, is supposed to be forward-looking. Our job is to peek around the corner and outwit the rest of the market.

2. The Operating Cash Flow

This handy indicator can give us a sense of how much money is circulating through the business after expenses are paid. If the current ratio is a picture, then operating cash flow is a video. It reveals how many hits a company can take without feeling cash-strapped.

We are looking for at least $10.0 billion worth of operating cash flow so that these companies can undertake mergers, acquisitions, or share buybacks.

3. The X Factor

The X Factor is our final indicator—it is slightly more difficult to explain.

To put it simply: each company needs a competitive advantage. Without something special to protect their market share, they are vulnerable to young upstarts. Having an X Factor—be it proprietary technology or exceptional leadership—is an essential ingredient for PAC stocks.

Apple Inc. Has Enough Cash to Fund Your Retirement

Apple Inc. (NASDAQ:AAPL) may seem like the most obvious choice for a list about tech stocks for long term investors—but that’s because it is the right choice. Forget what you hear on mainstream financial media. Apple stock is still one of the most secure investments around.

People started to panic in early 2016 when iPhone sales were slipping and Apple’s run as the biggest company in the world was under threat. Who could blame them? After more than a decade of record-setting sales, Apple dared to have a few subpar quarters! Shame! Shame!

But those AAPL stock bears were silenced in short order. Here’s why:

AAPL stock chart

Chart courtesy of StockCharts.com

Judging AAPL by a few bad quarters was, of course, a ridiculous way to value the stock. There was a simple explanation for those results. For one thing, Apple widened the gap between new “iPhone” releases, meaning that the “iPhone 7” was only due later in the year. Moreover, Apple’s Greater China division was facing troubled economic conditions.

Since the majority of iPhone sales growth was supposed to come from the Middle Kingdom, it’s hardly surprising that Apple’s top line suffered in the crunch that followed. Nonetheless, the company returned to full form in its latest quarterly report.

Record revenue, record iPhone sales…

But how does Apple fare in our system for evaluating long-term stocks? See for yourself.

Does Apple Meet Our Three Indicators?

Indicators

Apple Stats

Yes/No

Current Ratio

1.23

Yes

Operating Cash Flow

$65.42B

Yes

X Factor

iOS ecosystem

Yes

With a current ratio of 1.23, Apple is clearly capable of paying down its debts. In fact, this number is obscured by the $250.0-billion cash pile Apple has in Ireland. The Trump Administration hopes to convince Apple to repatriate that money by providing a “tax holiday.”

Bringing back those funds would be amazing for long-term investors! As for the operating cash flow, there’s clearly still a lot of cash coming into the firm. How many other tech stocks can say they have $65.4 billion passing through the firm in any given year? It’s unheard of.

But the X Factor is what ensures that AAPL stock can remain on the high dividend technology stocks list. Apple’s “iOS” ecosystem is its secret sauce. Once you have an iPhone, all your music is stored on “iTunes.” That pushes you towards other Apple products, like the “iPad” or “Macbook.”

By extension, it makes sense for you to pick “Apple Music” or “Apple TV” because they are so compatible with your devices. Apple’s iOS is what traps you in the Apple world.

Microsoft Corporation Is a Software Giant

Microsoft Corporation (NASDAQ:MSFT) is evidence of how much money you can make though investing in technology stocks. This company was founded in 1975 by Bill Gates and Paul Allen, and it made them extraordinarily wealthy. By 2007, Bill Gates had already been crowned the world’s richest man 13 years in a row. So obviously MSFT stock had peaked, right?

Wrong. Microsoft stock has tripled in value since then:

MSFT stock chart

Chart courtesy of StockCharts.com

During the last 10 years (as Microsoft stock was advancing +200%), the company was paying out tens of billions of dividends and share buybacks. It has enormous potential as a pass-through entity, where investors just sit back and collect income. But there is also potential for growth.

In recent years, Microsoft’s cloud computing division grew dramatically, lifting the stock to record highs once again. But how does the stock pass our long-term investing test?

Does Microsoft Meet Our Three Indicators?

Indicators

Microsoft Stats

Yes/No

Current Ratio

2.05

Yes

Operating Cash Flow

$36.67B

Yes

X Factor

Office

Yes

Bonus: Microsoft commits $40.0 billion of buybacks each year.

The answer is obvious.

Microsoft stock may have had a few bad years under the stewardship of CEO Steve Ballmer, but it hss always made money for investors. It is a proven winner. I remain bullish on MSFT stock, especially since the firm approved another $40.0 billion share buyback program.

Amazon.com, Inc. Is an Unstoppable Growth Machine

Amazon.com, Inc. (NASDAQ:AMZN) is the oddball in our list of long-term tech stocks. Unlike high dividend technology stocks, AMZN is still focused on growth. This may seem a little absurd for a firm valued at $402.7 billion, but CEO Jeff Bezos is an ambitious guy.

He is hell-bent on making Amazon the “Everything Store.” This basically means Amazon is always going to reinvest the money it makes into new projects. He will never slow down or stop pushing boundaries. For most companies, such a strategy could spell doom, but Amazon has Jeff Bezos as its chief executive. He is the best capital allocator on the planet.

Does Amazon Meet Our Three Indicators?

Indicators

Amazon Stats

Yes/No

Current Ratio

1.04

(Barely) Yes

Operating Cash Flow

$16.44B

Yes

X Factor

Jeff Bezos

Yes

Bonus: One-year target of $928.93.

Amazon is the exception to all rules. Even though it scrapes by on current ratio and operating cash flow, there are numerous reasons to be bullish on AMZN stock. For one thing, the services that Amazon provides are invaluable. Secondly, the share price continues to defy expectations.

But don’t just take my word for it. Listen to Warren Buffett, the greatest investor of our time, talk about Bezos.

“We haven’t seen many businessmen like him,” said the Oracle of Omaha. “Overwhelmingly, he’s taken things you and I’ve been buying and he’s figured out a way to make us happier buying those products, either by fast delivery or prices or whatever it may be, and that’s remarkable.” (Source: “Warren Buffett says he’s in awe of Jeff Bezos’ genius,” CNBC, May 2, 2016.)

If you’re still not convinced, then let the numbers speak for themselves. Here’s a chart comparing Amazon stock to the growth of Wal-Mart Stores Inc (NYSE:WMT) and Macy’s Inc (NYSE:M). It’s astonishing.

AMZN stock chart

Chart courtesy of StockCharts.com

Amazon crushed brick-and-mortar retailers. It established itself as the reigning power in e-commerce, cloud computing, and organizational efficiency. We believe that Jeff Bezos is the X Factor that makes AMZN one of the best technology stocks for long term investors.