With each passing year, it becomes more obvious just how important businesses in the technology sector are to the performance of the overall economy. There are some truly dominant enterprises here. And for investors, the ability to generate strong returns can drive increased interest in the space.
The Nasdaq Composite index currently trades near record territory. But there are still opportunities to put money to work. if you have $5,000 that you’re ready to invest for the long term, then look no further than these two tech stocks.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »
Dominant internet companies
The first business to consider is Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG). CEO Sundar Pichai previously said that this company has six products used by at least 2 billion people across the world. Search, YouTube, and Android, for instance, are undoubtedly some very popular platforms.
There’s also Meta Platforms (NASDAQ: META). It owns social media apps Facebook, Instagram, WhatsApp, Messenger, and Threads, which combined have a jaw-dropping 3.35 billion daily active users. That figure keeps expanding with each passing quarter.
Both companies have become dominant forces in the internet age, with a combined market cap of $4.1 trillion. They are critical to the daily lives of many individuals and businesses across the globe.
What’s more, they are some of most lucrative enterprises the world has ever seen. Alphabet’s operating margin in the past decade has averaged 26.3%, while Meta’s is even better at 39.4%. They generate copious amount of free cash flow and flex their financial strength with their strong balance sheets.
This advantageous position allows sizable artificial intelligence investments. In order to bolster their technological infrastructure, Alphabet and Meta are planning capital expenditures of $75 billion and $62.5 billion (at the midpoint), respectively, in 2025. There are very few companies that can throw around this kind of cash.
Network effects
It’s hard to overstate just how widely used Alphabet’s and Meta’s products and services are. An added benefit of this is that both businesses benefit from powerful network effects. This moat source helps protect them from competitive threats, whether from existing tech enterprises or from upstarts.
There is more information out there than ever before. The amount only increases with each passing moment. Consequently, people want to sift through this info. Here’s where Google Search provides tremendous value. More data improves the search algorithms, making the service more useful to people in a positive feedback loop.
And over time, advertisers can better target particular audiences based on search intent. The entire system gets stronger as it grows.
YouTube also has network effects. With a global audience of billions, content creators that want to amass a wide following gravitate to YouTube. More content then attracts a larger number of viewers.
Meta’s network effects are also powerful. Everyone wants to be on Facebook or Instagram because it seems everyone they know is on these platforms. The number of connections that can be made is exponential. And all of this interaction and engagement is monetized with ads.
Yes, anyone with some funding and software skills could launch a new social media app tomorrow. But it would be virtually impossible to build the scale Meta’s various properties have.
Pay the right price
Even though Alphabet and Meta are two great businesses, their valuations aren’t demanding. These are actually the two cheapest stocks of the “Magnificent Seven” group.
As of this writing, Alphabet shares trade at a forward P/E ratio of 20.8, while Meta’s shares trade at a 28.5 multiple. Given that both companies are expected to post double-digit annualized earnings-per-share growth over the next three years, investing $2,500 in each looks like a smart decision.
Should you invest $1,000 in Alphabet right now?
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and Meta Platforms. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
