The best US tech shares to buy
Ten undervalued stocks offer attractive prices in a predominantly overvalued sector.
Mentioned: Dayforce Inc (DAY), Endava PLC (DAVA), Lyft Inc (LYFT), Zoom Video Communications Inc (ZM), NICE Ltd (NICE), Paycom Software Inc (PAYC), Paylocity Holding Corp (PCTY), Sabre Corp (SABR), Sensata Technologies Holding PLC (ST), STMicroelectronics NV (STM)
The Morningstar US Technology Index has returned 47.69%, while the Morningstar US Market Index has returned 27.51% during the trailing one-year period through July 9, 2024.
The tech stocks that Morningstar covers look nearly 12% overvalued, but there are still opportunities to be found in the sector.
10 best US tech stocks to buy now
The stocks of these technology companies with Morningstar Economic Moat Ratings are the most undervalued according to our fair value estimates as of July 9, 2024.
Here’s a little more about each of the best technology stocks to buy, including commentary from the Morningstar analyst who covers the stock. All data is as of July 9, 2024.
Endava
- Morningstar Price/Fair Value: 0.47
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Infrastructure
Software infrastructure company Endava is the cheapest stock on our list of the best tech stocks to buy. Endava is trading 53% below our fair value estimate of $62 per share.
Endava, based in the UK, is an IT services company focused on providing digital transformation and engineering services. It generates revenue mainly by charging clients on a time and materials basis for services such as consulting/advice, customized software development and integration, and quality assurance and testing. Endava is highly exposed to the financial services sector, with nearly half of its revenue generated from the sector. Within financial services, Endava is known for its expertise in payments and private equity.
Like many of its peers, Endava’s core strategy is to land and expand, which means securing big clients and growing revenue in those relationships by increasingly providing these clients more services. Endava’s 10-largest clients account for around a third of group revenue with the largest, Mastercard, contributing around 10%. Mastercard has been a client for over 20 years.
Endava concentrates on the financial services and technology, media, and telecom industries. The company aims to diversify its industry exposure by securing new clients from new verticals. In particular, Endava is targeting clients in retail and healthcare given its current expertise is most transferrable to these areas.
Similarly, the company is geographically concentrated with around 40% of revenue generated in the UK and around 20% generated in continental Europe. To diversify, Endava is primarily growing its business in North America.
Endava’s delivery model is based on agile project management from employees in nearshore locations, which it plans to expand. To best serve its clients' unique digital transformation goals, the flexibility from the iterative nature of agile project management is effective.
Furthermore, the nonstandardized nature of these projects requires constant dialogue and interaction between Endava and its clients, which means having delivery teams with similar time zones to its clients (nearshoring) is best to deliver the project successfully in a timely manner.
Endava is striving to achieve a maintainable organic revenue growth rate of around 20% with a relatively stable adjusted-profit-before-tax margin of 20%.
Rob Hales, Morningstar Senior Equity Analyst
Lyft
- Morningstar Price/Fair Value: 0.54
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Narrow-moat Lyft, which falls under the software application umbrella, has become more undervalued among tech stocks this month. Lyft stock is 46% undervalued; we think the stock is worth $25.
In the US market, Lyft has emerged as the number-two ride-sharing player, a position we think it will keep for years to come. It is currently having difficulty maintaining its market share against the market leader, Uber, in pursuing riders in a highly lucrative addressable market (including taxis, ride-sharing, bikes, and scooters). In our view, Lyft warrants a narrow economic moat rating, thanks to the network effect around its ride-sharing platform and intangible assets associated with riders, rides, and mapping data, which we think can drive the firm to profitability and excess returns on invested capital.
From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation. It has tapped into the bike- and scooter-sharing markets, which we think will be worth over $12 billion by 2029, growing 7% annually. Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help the firm to expand its margins; without drivers, it could recognize a bigger chunk of the fare as net revenue. In contrast to Uber, Lyft is not focused on food transportation or logistics. We like Lyft's relatively narrower focus on consumer transportation but note that Uber has an edge over Lyft in terms of an earlier start, higher market share, and a stronger network effect around its services. In addition, unlike Uber, Lyft’s lack of revenue diversification won’t soften the impact of exogenous shocks like covid-19.
We believe Lyft may need to acquire riders more aggressively via lower pricing. However, we don’t think this is a death knell for future profitability. Compared with Uber, Lyft has fewer riders on its platform and fewer rides taken because it is focusing mainly on the US market; however, it may be able to avoid some bumps on the road toward GAAP profitability, including the international regulatory-related ones that may require additional costs.
Malik Ahmed Khan, Morningstar Equity Analyst
Paycom
- Morningstar Price/Fair Value: 0.54
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Another narrow-moat company from the software application industry, Paycom stock is trading 46% below our fair value estimate of $260 per share.
Paycom’s unified platform appeals to midsize and enterprise clients that prefer an all-in-one payroll and human capital management solution. The company’s platform is supported by a single database, which provides a single source of truth and allows efficient software development and maintenance. Unlike competitors, Paycom discourages data integrations to third-party providers but instead incentivizes clients to contain their HCM solutions within its unified platform by offering add-on modules, including time and attendance and benefits administration. In practice, new clients may consolidate their payroll and HCM solutions from multiple providers to an all-in-one solution by Paycom. The company is focused on driving greater automation and employee self-service, supported by complementary analytics tools for clients and the rollout of its Beti self-service payroll module.
We expect Paycom will continue to take share of the growing payroll and HCM industry through industry consolidation and capitalizing on the shortfalls of competitors. The company has reported impressive growth to date, reflecting an ability to win clients and demonstrating how the cost and efficiency benefits of streamlining payroll and HCM solutions to a single platform can overcome inherent client switching costs.
We anticipate Paycom's average revenue per client will increase at an average rate of 7% to 2028 due to a gradual shift upmarket and from taking greater share of wallet through upselling existing and new modules. Paycom's target market has shifted upward over several years, with the company formally lifting the upper bound to over 10,000 employees in 2023 from 2,000 in 2013. While we expect Paycom's average client size to increase, we expect its offering to be less appealing to mega enterprises that typically prefer to integrate best-of-breed solutions, in our view limiting the upmarket upside for Paycom.
Emma Williams, Morningstar Equity Analyst
Sensata Technologies
- Morningstar Price/Fair Value: 0.56
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Scientific & Technical Instruments
Sensata Technologies, part of the scientific and technical instruments industry, is the fourth-cheapest stock on our list of the best tech stocks to buy. Sensata stock is trading 44% below our fair value estimate of $69 per share.
We think Sensata Technologies is a differentiated supplier of sensors and electrical protection, predominantly for the automotive market. The firm has oriented itself to benefit from secular trends toward electrification, efficiency, and connectivity. Despite the cyclical nature of the automotive and heavy vehicle markets, electric vehicles and stricter emissions regulations provide Sensata the opportunity to sell into new sockets, which has allowed the firm to outpace underlying vehicle production growth by about 4% historically. We think such outperformance is achievable over the next 10 years, given our expectations for a fleet mix shift toward EVs and Sensata’s growing addressable content in higher-voltage vehicles.
In our view, Sensata’s ability to grow its dollar content in vehicles demonstrates intangible assets in sensor design, as it works closely with OEMs and Tier 1 suppliers to build its products into new sockets. We also think the mission-critical nature of the systems into which Sensata sells gives rise to switching costs at customers, leading to an average relationship length of roughly three decades with its top 10 customers. As a result of switching costs and intangible assets, we believe Sensata benefits from a narrow economic moat and will earn excess returns on invested capital for the next 10 years.
Over the next decade, we expect Sensata to focus on organic growth in electric vehicles and increasingly electrified industrial applications. The firm has historically been an active acquirer but is focusing on organic investment, reduced leverage, and increased shareholder returns in the medium term, of which we approve. The firm’s ability to grow content in electric vehicles and outperform underlying global automotive production are the primary drivers of our investment thesis.
William Kerwin, Morningstar Equity Analyst
Dayforce
- Morningstar Price/Fair Value: 0.56
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Dayforce has built a narrow moat in the software application industry. Dayforce stock trades 44% below our fair value estimate of $86 per share.
Dayforce offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay, and legacy Bureau products. The company has taken share of the expansive and growing HCM market through the appeal of its agile cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. Dayforce derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline human resources operations across multiple jurisdictions and leverage the platform’s scalable infrastructure. To maximize revenue per client and entrench its software further in a client’s business,
Dayforce continues to expand the functionality of Dayforce by rolling out new add-on modules and features. As a result, we estimate per employee per month revenue for a client adopting the full suite of Dayforce modules increased at a 30% compound annual growth rate over the three years to fiscal 2021, to about $50. In addition to traditional modules,
Dayforce expanded Dayforce’s functionality into the adjacent market of preloaded pay cards with the rollout of Dayforce Wallet in 2020. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Dayforce that leverages the firm’s exposure to millions of employees and their earned wages.
To remain competitive in an increasingly crowded market, Dayforce will need to maintain high levels of investment in product development and innovation, in our view. Dayforce’s functionality including continuous payroll calculation has provided a point of differentiation historically, but rivals are rapidly replicating these innovations, diminishing the competitive edge.
Dayforce has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run.
Emma Williams, Morningstar Analyst
Sabre
- Morningstar Price/Fair Value: 0.59
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Infrastructure
Next on our list of affordable tech stocks to buy is software infrastructure company Sabre. Sabre stock is trading 41% below our fair value estimate of $5 per share.
Despite near-term economic and credit market and long-term corporate travel demand uncertainty, we expect Sabre to maintain its position in global distribution systems over the next 10 years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents. Sabre’s 30%-plus GDS air transaction share is the second largest of the three companies (behind narrow-moat Amadeus and ahead of privately held Travelport) that together control about 100% of market volume. Sabre is also a leader in providing technology solutions to travel suppliers.
Sabre's GDS enjoys a network advantage, which is the source of its narrow moat rating. As more supplier content (predominantly airline content) is added, more travel agents use the platform, and as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book. The company's platform reach should grow as Sabre continues to revitalize its technology and looks to expand with low-cost carriers and in countries where it previously had only minimal penetration, which are also markets with higher yields than the consolidated North American region.
Replicating Sabre’s GDS platform would entail aggregating and connecting content from several hundred airlines to a platform that is also connected to travel agents, which requires significant costs and time. Although we see GDS aggregation, processing, and back-office advantages as substantial, technology architectures like those of Etraveli enable end users to access not only GDS content but supply from competing platforms, which could take some volume from companies like Sabre. Also, GDS faces some risk of larger carriers making direct connections with larger agencies, although we expect these relationships to be the exception rather than the rule and for Sabre to still be the aggregating platform in either case.
Dan Wasiolek, Morningstar Senior Equity Analyst
Zoom Video Communications
- Morningstar Price/Fair Value: 0.64
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Zoom Video Communications is another narrow-moat company in the competitive software application industry. Zoom stock trades 36% below our fair value estimate of $89 per share.
Zoom Video Communications’ mission is “to make video communications frictionless,” which it accomplishes with a unified, video-first communications platform that incorporates video, voice, chat, and content sharing. More recently, Zoom introduced a phone system and a contact center solution. The company offers a differentiated peer-to-peer technology, complete with proprietary routing technology. Zoom is a recognized market leader in meeting software and is disrupting and expanding the $100 billion market for collaboration software with its ease of use and superior user experience. We think the pandemic lockdowns demonstrated the strength of the solutions, which combined with an expanding portfolio help establish a narrow moat.
Zoom relies mainly on a low-touch e-commerce model that lends itself to viral adoption, but it has also established a direct salesforce to gather and serve larger, more strategic customers. The firm was in the right place at the right time during the covid-19 lockdowns and saw its user base explode. Outside of a broader portfolio, we see Zoom executing well so early in its lifecycle in a classic land-and-expand strategy. We like this approach because it offers the best of both worlds and should allow for penetration into the large enterprise accounts that drive revenue, as well as the ability to generate above-average margins. This is an opportunity for the company, which has also done an excellent job of balancing growth and margins. Growth has slowed after covid-19, even as margins have surged, so we think Zoom is well positioned to use cash flow generation to fund innovation and growth.
With the 2019 introduction of Zoom Phone, Zoom contact center, Zoom Apps, and OnZoom, the portfolio is expanding meaningfully. The company’s focus is squarely on adding as many users as possible. This starts with generating buzz and familiarity with free users while the direct salesforce sells to enterprise accounts. Last, customer count, deal size, and forward-looking metrics related to demand continue to expand.
Dan Romanoff, Morningstar Senior Equity Analyst
NICE
- Morningstar Price/Fair Value: 0.65
- Morningstar Uncertainty Rating: Medium
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Software application company NICE joins our list of best tech stocks to buy this month. NICE stock trades 35% below our fair value estimate of $265 per share.
Nice provides cloud and on-premises software solutions that primarily serve the customer engagement market as well as the financial crime and compliance, or FC&C, market. The majority of revenue is generated in the US, but international expansion has become a bigger priority.
The customer engagement segment contributes around 80% of company revenue, which includes Nice’s nascent public safety business. CXone, Nice’s flagship customer engagement product, is a cloud-native contact center as a service, or CCaaS, platform that delivers a seamless solution combining contact center software and workforce engagement management. CXone is an industry-leading product that will become increasingly critical for enabling omnichannel interactions amid a move to digital-first customer engagement. With only 15% to 20% of contact center agents in the cloud, including minimal from the enterprise market, the residual opportunity is significant. Consequently, we expect strong midterm growth as customers transition to the cloud.
Nice earns about 20% of revenue from its FC&C business, which represents cloud-based risk management, fraud prevention, anti-money laundering, and compliance solutions. We expect that the increasing cost of compliance, the digitalization of financial services firms, the disruption of digital assets, and the explosion of data will accelerate the cloudification of the financial-services industry. Nice now has cloud-based solutions to serve organizations of all sizes, including X-Sight for the enterprise market and Xceed for the small and medium-sized market.
For its 2022-26 strategic cycle, Nice is targeting double-digit total revenue growth, more than 80% of total revenue from cloud products, and a non-GAAP operating margin above 30%.
Rob Hales, Morningstar Senior Equity Analyst
Paylocity
- Morningstar Price/Fair Value: 0.65
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Software—Application
Narrow-moat Paylocity is the last of the software application companies on our list of best tech stocks. This relatively cheap tech stock is 35% undervalued; we think Paylocity stock is worth $205 per share.
Paylocity’s unified platform appeals to clients who prefer an all-in-one payroll and human capital management, or HCM, solution. Clients can customize through add-on modules, including talent management and benefits administration, alongside core payroll functionality, and integrate with over 400 third-party providers, including referral partners such as benefit brokers. A unique feature of Paylocity’s platform is the complementary inclusion of communication and engagement tools, including social collaboration platform
Community, and video, survey, and learning management tools. These features aim to drive higher employee engagement and satisfaction, benefiting the client as well as Paylocity by entrenching the software into the business.
We expect Paylocity will continue to take market share through industry consolidation of the highly fragmented small-business payroll and HCM market, paired with rising demand for outsourced solutions amid an increasingly complex regulatory environment. Approximately 65% of the small-business market is serviced by regional providers or do it yourself solutions using software such as Intuit’s Quickbooks or Microsoft Excel, creating meaningful scope for greater penetration.
We anticipate Paylocity will be able to take greater share of wallet through increased uptake of modules. While Paylocity's average client size has remained stable at above 100 employees per client, average revenue per client has increased at a CAGR of 10% over the nine years to fiscal 2023 primarily due to greater module attachment rates. We expect Paylocity will continue to invest in software development and tuck in acquisitions to expand its portfolio of modules to meet changing client need. We forecast average revenue per client to increase at an annual average rate of 4% reflecting increased module uptake and minimal like-for-like price increases.
Emma Williams, Morningstar Equity Analyst
STMicroelectronics
- Morningstar Price/Fair Value: 0.69
- Morningstar Uncertainty Rating: High
- Morningstar Economic Moat Rating: Narrow
- Industry: Semiconductors
Chipmaker STMicroelectronics rounds out our list of the best tech stocks to buy. ST stock trades 31% below our fair value estimate of $60 per share.
STMicroelectronics is one of Europe’s largest chipmakers and holds one of the broadest product portfolios in the industry. The company has made structural improvements to its product mix and gross margin profile, which has allowed it to carve out a narrow economic moat. We think ST has some promising growth opportunities on the horizon in microcontrollers and automotive products, including silicon carbide-based semiconductors.
ST didn’t always have the best track record, regularly failing to earn robust profitability a decade ago due to investments in money-losing digital chip businesses and share loss in other chip products, among other stumbling blocks. It has turned around nicely as it exited these businesses and reduced its investments in various digital chips. Nonetheless, it is still in some highly competitive segments of the chip industry, such as commoditylike discrete chips that carry lower margins than analog chips and microcontrollers from US-based peers.
We anticipate strong competition from Chinese firms in these areas in the years ahead but think ST’s reliability will still give it a leg up on these upstarts.
Still, ST’s leading technologies and strong position in the automotive market are reasons to be optimistic about the future, with especially promising opportunities in silicon carbide-based power products. The automotive industry is focused on safer, greener, smarter cars, which is leading to increased electronic content per vehicle. Broad-based chipmakers like ST stand to profit from greater demand for advanced infotainment systems, battery management solutions, and sensors associated with new safety features like blind-spot detection. Broad-based microcontroller sales also appear to be a nice growth avenue.
We anticipate decent growth and profitability improvement out of ST. However, we see wider moats and even more attractive product mixes and margin profiles across several pure-play US-based analog chipmakers we cover.
Brian Colello, Morningstar Strategist
