Technology stocks have been hit hard this year. The sell-off is mainly the result of rising bond yields, which have reduced the appeal of owning expensive growth shares.
While I think we could see more volatility in the technology sector in 2022, some tech stocks are starting to look quite attractive in my view. With that in mind, here’s a look at two stocks I’ve had a nibble at in the last few weeks.
A defensive Big Tech stock
Given that there’s a bit of uncertainty as to the near-term outlook for the tech sector, my first buy was slightly defensive – Big Tech giant Microsoft (NASDAQ: MSFT). I picked up some stock for $307 per share – about 12% below the company’s 2021 highs (I bought a little too early, in hindsight).
Microsoft is one of my favourite tech stocks. In fact, last year, I wrote that if I could only own one stock for the next decade, it would be MSFT. Why do I like it so much? There are a few reasons.
For starters, it operates in a number of high-growth industries including cloud computing, video gaming, artificial intelligence, remote work, and more.
Secondly, it has a top CEO in Satya Nadella. Since Nadella took the helm in 2014, he has transformed the company into an absolute powerhouse of a business.
Third, the stock offers a nice mix of offence and defence. Because so many businesses rely on its products, revenues are unlikely to plummet any time soon.
Even after the recent share price pullback here, MSFT shares still have a relatively high valuation. For the year ending 30 June 2022, Wall Street analysts expect the group to post earnings per share of $9.22. That means I paid about 33.3 times this year’s forecast earnings for my shares.
This higher valuation does add some risk. However, I’m comfortable with it. To my mind, MSFT deserves a higher valuation due to its high-quality attributes.
A FTSE 250 tech company that’s growing rapidly
Turning to the UK market, I’ve also had a nibble at Kainos (LSE: KNOS). It’s an under-the-radar FTSE 250 company that specialises in digital transformation solutions. Its client list includes the NHS, the Home Office, and the Bank of Ireland. I paid around 1,600p per share for my shares. Late last year, this stock was trading near 2,100p.
The reason I like Kainos is that I’m very bullish on digital transformation as a theme. All over the world, businesses and government organisations are rushing to digitalise their businesses. In an effort to be more productive, they’re moving to the cloud, they’re automating processes, and they’re analysing their data more. This is providing massive tailwinds for companies like Kainos, which has seen its revenue jump 140% in three years.
Like MSFT, Kainos does have a high valuation. I paid around 39 times next year’s earnings for my shares. This high valuation adds risk – if growth slows I’d expect the stock to be volatile.
I’m willing to accept some volatility here, however. To my mind, the long-term growth prospects are attractive. It’s worth pointing out that only a few months ago, Chairman Tom Burnet bought a load of KNOS stock near the 1,800p level. I’m happy to have bought at a lower level than this top-level insider.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Edward Sheldon owns Kainos and Microsoft. The Motley Fool UK has recommended Kainos and Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
