The Best Tech Stocks to Buy

Technology stocks offer investors the promise of growth in ways that few other sectors can. After all, tech is synonymous with innovation that spawns new products, services, and features.

The Morningstar US Technology Index has returned 41.92%, while the Morningstar US Market Index has returned 27.93% during the trailing one-year period through Sept. 17, 2024.

The tech stocks that Morningstar covers look slightly overvalued as a group, but there are still opportunities to be found in the sector.

10 Best 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 Sept. 17, 2024.

1. Endava DAVA
2. STMicroelectronics STM
3. Sensata Technologies ST
4. Nice NICE
5. Infineon Technologies IFNNY
6. Sabre SABR
7. NXP Semiconductors NXPI
8. Sony SONY
9. UiPath PATH
10. Block SQ

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 Sept. 17, 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 again this month. 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%.

STMicroelectronics

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Semiconductors

Chipmaker STMicroelectronics is next on our list of the best tech stocks to buy. It is the first of three companies from the semiconductor industry to make the list. ST stock trades 46% below our fair value estimate of $52 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.

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, has consistently been among the most undervalued on our list of tech stocks to buy. Sensata stock is trading 44% below our fair value estimate of $64 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.

Nice

• Morningstar Price/Fair Value: 0.59
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Application

Software application company Nice trades 41% below our fair value estimate. We think Nice stock is worth $275 per share with medium uncertainty—along with two other companies, the lowest on our list of undervalued tech stocks.

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.

The company 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-size 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%.

Infineon Technologies

• Morningstar Price/Fair Value: 0.61
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Semiconductors

German company Infineon Technologies is the second semiconductor manufacturer on our list of best tech stocks to buy. Infineon stock is 39% undervalued relative to our fair value estimate of $54.

Infineon is a leading broad-based European chipmaker, with significant exposure to secular growth drivers in the industrial and automotive chip sectors. Infineon should emerge as a leading supplier for electric vehicles and active safety systems used in cars, with increasing exposure to car “infotainment” systems. However, like most chipmakers, Infineon’s business remains highly cyclical as demand rises and falls with the health of its various end markets.

Looking at the automotive chip market, electric vehicles and cars with advanced powertrain technology and safety systems require a variety of sensors and power voltage chips supplied by firms like Infineon. Silicon-carbide, or SiC-based semis, used to handle higher voltages and improve the range and efficiency of EVs, are a particularly attractive opportunity for Infineon, but also for its rivals. Infineon’s exposure to power semis also allows it to benefit from trends in the electronics industry toward power conservation, not only in more efficient devices like industrial drives, but also in green energy solutions like solar panels. Infineon is also a leader in chip card and security products, such as chips for chip-and-pin credit cards. Finally, we think limiting exposure to challenging markets is just as important as increasing exposure to promising markets, and Infineon did a good job of eliminating unattractive business segments in prior years.

Nonetheless, Infineon’s product lines still face formidable competition. Many other large semiconductor firms also focus on power semiconductors and have similar products. Further, Infineon focuses on discrete power products rather than analog power management integrated circuits. While the former products are valuable to customers, the latter of which we view as more complex products that allow leading analog firms (such as several wide-moat names we cover) to enjoy stronger pricing power and relatively higher returns on invested capital. Infineon also has hefty manufacturing capacity for its products, which may lead to a higher fixed-cost structure and may cause significant margin compression when supply far exceeds demand.

Sabre

• Morningstar Price/Fair Value: 0.65
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Infrastructure

Software infrastructure company Sabre is trading 35% below our fair value estimate. We think Sabre stock is worth $5 per share.

Despite near-term economic 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 network prowess should be supported by next-generation platforms, like SabreMosiac, which is an open-source cloud-based, artificial intelligence solution that makes it easier for airlines to customize its offering and upsell content.

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.

NXP Semiconductors

• Morningstar Price/Fair Value: 0.73
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Industry: Semiconductors

NXP Semiconductors rejoins our list of best tech stocks to buy. It is the second of three companies with a medium uncertainty rating and the first of two companies with a wide moat. NXP stock trades 27% below our fair value estimate of $320 per share.

NXP Semiconductors is one of the largest suppliers of semiconductors for the automotive market and a significant player in the analog and mixed-signal chip markets generally. We believe the company has a strong position in the automotive, industrial, mobile, and communications infrastructure markets through a combination of switching costs and intangible assets. Although the company sells into cyclical industries, the strength of these competitive advantages gives us confidence that it will generate excess returns over the cost of capital over the next decade and beyond.

The merger of Freescale and the former NXP in 2015 led to a powerhouse in automotive semiconductors, which makes up more than half of the company's total revenue. Like many of its chipmaking peers, NXP is well positioned to benefit from safer, greener, smarter cars in the years ahead. It is among the market leaders in automotive semis, especially in microcontroller units, or MCUs, which serve as the brains of a variety of electronic functions in a car. We’re optimistic about NXP’s development of products used in active safety systems, such as 77-gigahertz radar modules and battery management systems in upcoming electric vehicles, most notably from Volkswagen.

Yet NXP’s prospects are also bright in its industrial and Internet of Things segment, thanks to its legacy strength in MCUs and embedded processors, along with its development of newer crossover MCUs that combine some of the benefits of each.

In communications infrastructure, NXP should remain a key supplier of power amplifiers into 5G wireless infrastructure equipment. Finally, NXP’s mobile wallet solutions should remain the industry’s gold standard and the backbone of mobile payment technologies offered by Apple, Google, and others.

Sony

• Morningstar Price/Fair Value: 0.74
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Industry: Consumer Electronics

Consumer electronics giant Sony also rejoins our list of best tech stocks. Sony and NXP Semiconductors are the only two companies with wide moats to make the list. Sony stock is trading 26% below our fair value estimate of $122 per share.

As technologies and consumer preferences change rapidly, it is generally difficult for consumer electronics companies to build an economic moat. The replacement cycle for digital appliances is usually four to six years, but as most products are commoditized, it is difficult for manufacturers to build an ecosystem that prevents customers from switching to other brands. As a result, Sony’s profitability on electronics had been unstable in the past, while its music, movies, and financial services businesses have generated solid results.

Over the past decade, Sony has transformed its business model to enable more solid and stable growth by reducing the volatility of the consumer electronics business and by aggressively investing in content for its entertainment businesses such as music, movies, and games.

In the consumer electronics business, profits are generated from digital cameras and audio equipment, where Sony has strengths, while the TV business is thoroughly focused on avoiding losses by focusing on premium products and strictly managing inventories.

In the music and movie businesses, Sony has been able to seize growth opportunities such as the expansion of the streaming market, by expanding its content and exploring new artists.

The image sensor business has the largest global market share. The majority of sales come from the mobile market, which is benefiting from the strong demand for improved image quality in smartphone cameras. However, unlike the entertainment businesses, image sensors require high capital investment and research and development, and with such high fixed costs, we believe the profitability of the business is not high enough.

PlayStation is Sony’s largest revenue-generating business. While user migration from PS4 to PS5 is progressing well, rising game development costs and competition from other platforms such as Steam are becoming a concern for the business.

UiPath

• Morningstar Price/Fair Value: 0.74
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Infrastructure

UiPath has built a narrow moat in the software infrastructure industry. UiPath stock trades 26% below our fair value estimate of $16.50 per share.

UiPath offers end-to-end cross-application process automation software. It deploys a combination of automation technologies including robotic process automation, application programming interface, artificial intelligence, and low-code/no-code functionality to automate complex, multistep processes. UiPath’s core RPA technology boasts leading market share by revenue and has garnered accolades from industry analysts for superior product functionality and strategy.

The UiPath Business Automation Platform uncovers automation opportunities in customer’s workflows via sophisticated tools including process, task, and communication mining. Once a process is identified as ripe for automation, software developers and business users (known as citizen developers) establish rules, triggers, and processes that run either on command or continuously without human intervention. These processes can include automation to open and log into software, extract data from documents, move folders, fill in forms, update information fields and databases, and read and generate written communication. Lastly, the platform supports analytics, governance, and testing of automated processes at scale.

We expect UiPath to continue to execute a successful land-and-expand strategy as customers uncover further automation opportunities and adopt a broader set of platform functionality. UiPath’s offering delivers meaningful cost savings, efficiency, and risk-management benefits to customers looking to automate repetitive processes traditionally executed manually by humans. Automating such tasks allows customers to reduce resource intensity, redirect resources to higher-value tasks, and support business growth. Examples of repetitive tasks primed for automation include insurance claims processing, invoice and order processing, employee recruitment and onboarding, loan applications, and customer service and support, such as password resets or scheduling appointments. In addition, advancements in AI are supporting automation of more complex and cognitive tasks such as those with greater variability and unstructured data.

Block

• Morningstar Price/Fair Value: 0.75
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Infrastructure

Narrow-moat Block rounds out our list of best tech stocks to buy again this month. Block stock is 25% undervalued relative to our fair value estimate of $90 per share.

We think Block’s legacy Square business model, characterized by efficient client onboarding, innovative point-of-sale devices, flat fees, and an internally developed and integrated set of software solutions, allows the company to reach and retain micro merchants that are unviable for other acquirers. In essence, we believe Square’s initial success came largely from expanding the acquiring market, as opposed to stealing material share from existing players.

To develop sufficient scale, Square needed to move past its micro merchant base, and results over the past few years suggest it is doing just that. At this point, about two thirds of its payment volume comes from merchants generating over $125,000 in annual gross payment volume. Furthermore, absolute growth in clients above this threshold has accelerated meaningfully over the past few years, while absolute growth in merchants below this threshold has largely held steady. We think the move upstream and cross-selling will allow Square to materially improve margins in the years ahead and show the viability of its business model. But we see Square as a narrow-moat niche operator, not a disrupter, with market share limited by its relatively high pricing and long-term margins constrained by its relative lack of scale. We would also note that Clover has proved itself a strong competitor and has been consistently outperforming Square.

The company's effort to build out a consumer-facing business surrounding its Cash App creates option value, but we see more uncertainty on this side of the business. Block is competing in a space with winner-take-all dynamics, and its competitors have large consumer customer bases, which we think justified some initial skepticism. However, Cash App's performance compared with peers has been relatively strong, suggesting it is positioning itself to be a longtime leader in the space. But while we believe management's strategy for this business makes sense, the long-term economics of this business remain very uncertain.

How to Find More of the Best Technology Stocks to Buy

Investors who would like to extend their search for the best tech stocks can do the following:

• Review Morningstar’s comprehensive list of technology stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of technology stocks to research and watch.
• Read the latest news about notable technology stocks from Morningstar technology analyst Dan Romanoff.