This year, technology stocks were as usual the focus of much attention in the stock market, especially as the sector made great gains on the back of the wider adoption of artificial intelligence and a lackluster 2022. Investors tend to closely track this sector since it has a history of outsized returns and has been pivotal to growth across the economy. A key barometer for the sector is the Technology Select Sector SPDR Fund (XLK), which has risen by 38% over the past year🔯, outperforming the Russell 1000 Index’s healthy increase of about 15%.

Below is an analysis of♑ the top tech stocks for the quarter, eval🌊uated for best value, fastest growth, and most momentum. The data is as of Nov. 24, 2023.

Best Value Tech Stocks

Value investing is based on the principle that, with the right metrics, investors can identify stocks trading below their inherent value. These undervalued stocks should thus be poised for an upward trend when the market finally corrects the mispricing. An oft-used method is to pinpoint prospects by analyzing fundamental metrics, such as the price-to-earnings (P/E) ratio. Generally, a lower P/E ratio should signal a more attractively valued stock—it's attractive since it's valued less than its fundament💜al value—that could offer a greater return once the market adjusts.

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• Diebold Nixdorf Inc.: The firm designs and builds point-of-sale terminals and self-service transaction systems like ATMs and offers related software and services. The company emerged from financial restructuring in August and has been relisted on the New York Stock Exchange (NYSE).
  
• Yiren Digital Ltd.: A finance company based in China, it operates a financial marketplace that connects investors with borrowers. Yiren Digital offers payment processing, loan services, and insurance products.
• Lizhi Inc.: An entertainment company in China, Lizhi provides podcasts and other audio products through apps like Tiya, LIZHI, and LIZHI Podcast.

Fastest-Growing Tech Stocks

When evaluating growth stocks, it’s important to consider growth i💝n both revenue and earnings per share (EPS) since they provide essential measures of a company’s performance. However, relying only on either of these could give a skewed image of a firm’s potential growth. Such an image could result from temporary phenomena like one-off gains, tax law changes, and other atypical circumstances.

For a more balanced assessment, we employ a dual-metric approach. We equally weight the most recent year-over-year (YOY) percentage growth in both revenue and EPS, giving each 50% consideration. This should smooth out anomalies and provide a clearer view of each company’s true growth trajectory. In addition, we exclude companies that exhibit extraordinarily high growth rates—specifically🐓, those with quarterly growth exceeding 1,🍷000%—since these are outliers not likely on a sustainable trendline.

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• Itron Inc.: The firm provides technology products for city management through network infrastructure and transportation services. The company has had solid momentum as its shares have gained 30.8% during the year to date against the 4.6% decline in its subsector, electronics—testing equipment.
• Palo Alto Networks Inc.: The software company provides cybersecurity technology through its subscription-based platform. Its offerings include threat and malware protection, DNS security, and data loss prevention. On Nov. 15, the company released first-quarter financial results that said net income rose over ninefold, with revenue growing 20%.
• Vicor Corp.: The company develops, manufactures, and sells electric power converters, including DC-DC converters, input filtering, and output power products.

Tech Stocks With the Most Momentum

Momentum investing looks to capitalize on existing market trends by targeting stocks that have shown a faster increase in price than peers and the broader market. The approach is premised on the idea that stocks on an upward trajectory will likely continue their outperformance, at least in the short term, since what's driving the upward trend is unlikely to be a brief surge.

Because market disruption is common in the tech sector, momentum investing can be particularly effective for these stocks. Tech firms frequently undergo swift changes in value due to technological breakthroughs, market adoption of their products, or shifts in consumer preferences. By targeting tech stocks that have shown fast growth and sustained their performance over the past year, investors aim to ride the wave of these companies' continued success.

Below, we spotlight tech stocks that have delivered the highest total return🐭 over the past 12 months.

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• Applied Optoelectronics Inc.: The company makes diode lasers, photodiodes, and related modules. On Nov. 9, 2023, the company reported third-quarter results in which its net loss was 43% YOY, and its revenue grew 10% over the quarter the previous year. This increase in profit in part results from higher demand for its data center products.
• EHang Holdings Ltd.: A China-based aerospace and defense company that develops and manufactures drone technology for transportation, city management, and aerial media purposes. EHang agreed in early October to supply the Hefei Municipal Government with a low-altitude economy ecosystem for Hefei City. The deal includes financing of up to $100 million.
• Cipher Mining Inc.: The software company engages in large-scale Bitcoin mining through its data centers. In its last quarter, Cipher secured a new location in Texas that has received preliminary approval for using up to 300 megawatts of power from the Electric Reliability Council of Texas, which manages the Texas power grid.

Advantages of Tech Stocks

Growth potential: Technology stocks, especially those in emerging areas, have become paradigmatic of explosive growth in the stock market. For a long time, when there have been moments of the sector underperforming, as happened in 2022, this has been a time to put money into the sector to take advantage long term trends.

Growth within the tech sector can vary widely. Small-cap and penny tech stocks could have explosive growth following breakthroughs, but the larger tech firms are more limited in just how much they can grow given their size. Nevertheless, the tech sector is distinct in that even some of its largest players, like Meta Platforms Inc. (META), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Alphabet Inc. (GOOGL), continue to have significant opportunities for growth. These FAANG stocks have yielded about 25% returns over the past decade.

Advanced innovation: Tech stocks are synonymous with innovation and what's next for our culture and society. The recent surge of AI-related investments means the sector will keep pushing the boundaries of the possible, and investors can reap the rewards of this.

Drawbacks of Tech Stocks

Even the tech sector stumbles: As tech stocks evoke images of relentless growth, the reality is far more nuanced than the media and pop culture myths suggest. The sector's performance in 2022 is a stark reminder: tech companies, including giants like Apple and Alphabet, had significant downturns, with their stock values dropping by 27% and 39%, respectively. This decline resulted from dive▨rse challenges, including the aftermath of the pandemic and supply chain disruptions. Despite 𝐆their historical gains, tech stocks are not immune to market volatility and can be just as susceptible to downturns as any other part of the economy.

Investing in firms left behind: The fast-moving nature of the tech industry poses heightened prospects and unique challenges, especially if you're an investor not deeply versed in the technology of the companies you're investing in. The rapid pace of innovation and change in the sector means that trends and prospects can emerge and grow quickly, which means those same trends can also evolve away from the firms in which you've put your money. Investors not closely attuned to these shifts can quickly find themselves left behind.

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As of the date this article was written, the author does not own any of the stocks listed above.