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.

During the trailing one-year period, the Morningstar US Technology Index has returned 35.98%, while the Morningstar US Market Index has returned 24.82%.

The tech stocks that Morningstar covers look 3% overvalued as of June 3, 2024.

7 Best Tech Stocks to Buy Now

The stocks of these technology companies with Morningstar Economic Moat Ratings are the most reasonably priced according to our fair value estimates as of June 3, 2024.

1. Paycom PAYC
2. Dayforce DAY
3. Sensata Technologies ST
4. Lyft LYFT
5. Sabre Corp SABR
6. Smartsheet SMAR
7. Paylocity PCTY

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 June 3, 2024.

Paycom

• Morningstar Price/Fair Value: 0.56
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Application

Paycom is the cheapest stock on our list of the best tech stocks to buy. The stock of this narrow-moat company from the software application industry is trading 44% 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.

Dayforce

• Morningstar Price/Fair Value: 0.58
• 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 42% 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.

Sensata Technologies

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Scientific & Technical Instruments

Narrow-moat Sensata Technologies, part of the scientific and technical instruments industry, is the third-cheapest stock on our list of the best tech stocks to buy. Sensata stock is trading 40% 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.

Lyft

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Application

Narrow-moat Lyft, which also falls under the software application umbrella, looks to be a relatively cheap tech stock to buy this month. Lyft stock is 37% 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.

Sabre

• Morningstar Price/Fair Value: 0.64
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Infrastructure

Next on our list of affordable tech stocks, narrow-moat Sabre is from the software infrastructure industry. Sabre is trading 36% 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.

Smartsheet

• Morningstar Price/Fair Value: 0.67
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Application

Smartsheet is trading 33% below our fair value estimate of $56 per share. This software application company has earned a narrow economic moat rating.

Smartsheet is a leading provider of collaborative work management SaaS solutions. The emerging SaaS niche aims to improve the efficiency and productivity of project and process management by displacing widely deployed but suboptimal incumbent tools of email and spreadsheets. Smartsheet’s platform allows nontechnical users to configure, automate, and visualize custom workflows and notifications, dynamically assign tasks and permission data access, and build centralized dashboards for real-time visibility, accountability, and consistency across projects. The platform leverages integrations to adjacent business applications and productivity tools to centralize data, reduce error-prone manual data entry, and improve process efficiency.

Smartsheet has leveraged a freemium go-to-market motion and heavy investment in product innovation and platform infrastructure to secure a solid footing in the sticky enterprise market. While multiple CWM vendors will likely capture share of the expansive addressable market for purpose-built project management tools, we believe Smartsheet is well-placed to rapidly expand within existing clients and become the enterprise, IT-certified vendor of choice. At present, sprawling enterprises likely engage multiple CWM solutions concurrently for siloed projects; however, we expect efforts to standardize internal processes and optimize project management will lead to provider consolidation over the long term. This dynamic will benefit providers like Smartsheet with the security, scalability, and compliance features enterprise clients demand.

We expect Smartsheet to win new clients and take greater share through free user conversion and module adoption, while embedding the platform further into mission-critical operations. We anticipate Smartsheet will continue with a successful playbook of growing seat expansion through the organic or assisted identification of new cases, and uptake of higher-margin capabilities. While over 30% of 2024 revenue was derived from add-on capabilities, less than 10% of the customer base had adopted these solutions, providing ample scope for further penetration.

Paylocity

• Morningstar Price/Fair Value: 0.67
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Industry: Software—Application

Narrow-moat Paylocity, the last of the software application companies, rounds out our list of the best tech stocks to buy. This relatively cheap tech stock is 33% 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.

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.