2 Great Tech Stocks to Buy as Fed Mulls Further Rate Hikes

• The Nasdaq Composite has significantly outperformed the S&P 500 and the Dow Jones Industrial Average thus far in 2023.
• High-growth tech stocks have come back in favor following last year’s selloff, thanks to receding Fed rate hike fears.
• As such, I recommend buying Fortinet and Block as interest rates begin to fall back down to Earth in the months ahead.

The tech-heavy Nasdaq Composite has been the best performer of the three major U.S. indices by a wide margin so far in 2023, surging 13.3% as investors piled back into the battered growth stocks of yesteryear.

That compares to a 4.3% year-to-date increase for the benchmark S&P 500 index and a 1.8% decline for the blue-chip Dow Jones Industrial Average.

Nasdaq, DOW, S&P 500 YTD Price Performance

The recent rally has been driven by mounting speculation that the Federal Reserve will pause its tightening cycle and even cut rates by the end of the year as cracks begin to appear in the financial system.

As of Wednesday morning, futures trading implies a 90% probability of a 25-basis-point rate hike at the conclusion of today’s Fed policy meeting and a 10% chance of no hike at all, according to Investing.com’s Fed Rate Monitor Tool.

Fed Rate Monitor Tool

Source: Investing.com

The possibility of a 50bps hike is now effectively off the table after being a betting favorite just a few weeks ago due to fresh uncertainties around the health of U.S. banks.

Taking that into consideration, I recommend buying shares of Fortinet (NASDAQ:FTNT) and Block (NYSE:SQ) as the U.S. central bank becomes less aggressive on interest rate hikes in the months ahead. Both companies still offer further upside, in my view, and have plenty of room to grow their respective businesses, making them solid long-term investments.

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Fortinet

• Year-To-Date Performance: +27.8%
• Market Cap: $49 Billion

With the Fed likely to end its monetary tightening cycle in the months ahead, I personally believe that Fortinet is one of the best companies to own as it continues to benefit from robust cybersecurity spending from large enterprises amid the current geopolitical backdrop.

I previously mentioned Fortinet as one of the top high-growth tech stocks to buy in 2023 given the cybersecurity firm’s improving fundamentals. Since the article’s publication on Jan. 4, FTNT has been on a bullish trend, gaining almost 29%.

Sporting a near-perfect InvestingPro+ financial health score of 4/5, the information security specialist is well-placed to achieve ongoing growth, thanks to strong demand for its cloud-based intrusion prevention systems and endpoint security components. Pro+ also highlights several additional tailwinds Fortinet has going for it, including healthy profitability and solid cash flow growth.

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Source: InvestingPro

Fortinet’s fourth quarter update released last month made it clear that the company is executing well despite a difficult economic backdrop of rising rates and elevated inflation. Calculated billings — which refers to revenue plus deferred revenue acquired over the quarter — surged 31.6% year-over-year to a record $1.72 billion in Q4, exceeding forecasts of $1.69 billion.

Underlining the strength and resilience of its business, Fortinet has now topped Wall Street’s bottom-line estimates for 20 consecutive quarters, while beating revenue expectations in 19 of those reports. The tech company competes in the firewall network security market against names like Cisco (NASDAQ:CSCO), Palo Alto Networks (NASDAQ:PANW), Check Point Software Technologies (NASDAQ:CHKP), Juniper (NYSE:JNPR), and others.

“Given our cost-for-performance advantage, the convergence of security and networking, and the consolidation of products and vendors, we expect to continue our solid growth trajectory,” founder and CEO Ken Xie said in the earnings release.

Fortinet Daily Chart

Shares have enjoyed a powerful rebound since sinking to a bear market low of around $42 in early November, running about 47% higher in the past five months. Despite the recent rally, FTNT stock, which ended at $61.46 on Tuesday, remains roughly 16% below the December 2021 all-time high of $74.35.

At current levels, the Sunnyvale, California-based network security firm has a market cap of $49 billion, a steep discount compared to a valuation of almost $60 billion at its peak.

Wall Street has a long-term bullish view on FTNT, with 36 out of 37 analysts surveyed by Investing.com rating it as either a ‘buy’ or a ‘hold’. Shares have an average analyst price target of around $71, representing an upside of about 13.3% from current levels.

Block

• Year-To-Date Performance: +23.3%
• Market Cap: $46.7 Billion

Square parent Block — the digital payment provider run by former Twitter CEO Jack Dorsey — is widely considered the leader in the fast-growing mobile payment processing industry. As such, I believe SQ stock is a smart buy as investors dial back expectations for future rate hikes amid the uncertain climate.

With strong growth across its booming Cash App ecosystem and what appears to be a long runway ahead, Block is not only a strong buy recommendation according to quant ratings, but also one of my top tech stocks with upside potential for the coming months.

The quantitative models in InvestingPro+ point to a gain of 24.5% in SQ stock over the next 12 months, bringing shares closer to their fair value of $95.65. Additionally, more than three quarters of analysts surveyed by Investing.com rate SQ at the equivalent of a ‘buy’ rating, with an average price target of around $99, implying upside of 27.3% from recent trading levels.

SQ Fair Value

Source: InvestingPro

In a sign of how well its business has performed amid the challenging macro environment, Block reported $1.66 billion in gross profit for its fourth quarter, up 40% from the year-ago period. That beat Street estimates of $1.53 billion. Its Cash App mobile payments business generated $848 million in gross profit, a 64% year-over-year increase, while its Square point-of-sale unit saw gross profit grow 22% on an annual basis to $801 million.

The fintech powerhouse said it ended 2022 with 51 million monthly transacting actives for Cash App in December, up 16% from a year earlier.

CEO Dorsey said in a letter to shareholders that the company showed strong growth, even as other payment firms warned about a looming economic slowdown and possible recession.

“Looking ahead to 2023 and beyond, we are focused on balancing growth and efficiency and will prioritize speed, agility, and accountability,” Dorsey added.

SQ Daily Chart

SQ stock closed at $77.46 last night, earning the San Francisco, California-based financial technology company a market value of $46.7 billion.

Shares have gained approximately 23% thus far in 2023 and are up almost 51% since falling to their lowest level since April 2020 on November 3. Despite the powerful rebound, the mobile payments specialist remains nearly 75% below its all-time high of $289.23 reached in August 2021.

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Disclosure: At the time of writing, I am long on the Dow Jones Industrial Average, the S&P 500, and the Nasdaq 100 via the SPDR Dow ETF (DIA), the SPDR S&P 500 ETF (SPY (NYSE:SPY)), and the Invesco QQQ Trust ETF (QQQ). I am also long on the Technology Select Sector SPDR ETF (XLK).

I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.