Technology has become the single most important sector in the U.S. stock market.
It contains the three most valuable companies in the world — Microsoft (NASDAQ: MSFT), Apple, and Nvidia.
It has crushed the S&P 500 over the long term, gaining 342% over the last decade compared to 145% for the index.
The technology sector has grown in value by so much that it now makes up 29.6% of the S&P 500. That’s even when excluding tech-focused companies that aren’t in the tech sector — like Alphabet, Meta Platforms, Amazon, and Tesla, to name a few.
But the sector’s dominance also has its drawbacks. Due to massive market caps and the size of their declines, big tech stocks are responsible for most of the S&P 500’s sell-off so far this year.
Long-term investors who can stomach the volatility of tech stocks may want to take a closer look at Microsoft, Broadcom (NASDAQ: AVGO), and Oracle (NYSE: ORCL). These stocks are down 23%, 41%, and 33% from their 52-week highs, respectively, at the time of this writing. And all three companies have paid and raised their dividends for 15 consecutive years, providing investors with a one-two punch of passive income and potential gains.
Here’s why all three tech stocks are worth buying now.
Microsoft is arguably the most well-rounded tech stock. The Microsoft 365 suite of apps gives the legacy tech giant an entrenched position in software. However, the business’ most valuable aspect is its Intelligent Cloud segment.
Microsoft was an early investor in OpenAI and developed its own AI tools as well. It has integrated Copilot across its products and services, including Microsoft 365, GitHub Copilot for programmers, and Copilot in Azure for cloud. Microsoft also owns LinkedIn, Activision Blizzard, Xbox, and more.
The company is a massive high-margin cash cow with a highly diversified business. It also has more cash, cash equivalents, and short-term investments than debt on its balance sheet, providing a vital cushion in case of economic weakness or if Microsoft wants to pounce on an acquisition opportunity.
The sell-off in Microsoft stock pushed its price-to-earnings (P/E) ratio down to just 29. For context, Microsoft’s median P/E ratio over the last three-year, five-year, seven-year, and 10-year periods is between 32.5 and 34.3. So investors are getting the opportunity to buy the stock at a relatively inexpensive valuation. The stock is even cheaper given that Microsoft is arguably a much better business with more appealing growth prospects now than in past years, thanks to the cloud and AI. As you can see in the following chart, Microsoft is at the top of its game with its highest margins in a decade and steady revenue growth.
