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So far this year, the S&P 500 information technology sector has risen 10%, providing some comfort to investors following a 29% decline in 2022. Then again, the depressing new focus on cost-cutting, including a painful round of layoffs, means it might benefit investors to see which companies were already improving their profit margins while still growing sales during their most recent reported quarters.
Below is a screen of tech companies in the S&P 500
SPX,
that increased their sales while improving profit margins during fiscal quarters ended Dec. 31 or later. (About 20% of the S&P 500 have fiscal years that don’t match the calendar.)
Before showing the results of the screen, we need to define what a “tech stock” is, because the benchmark index’s sectors, as defined by S&P Dow Jones Indices, don’t necessarily match investors’ perceptions.
Investors often think of the “FAANG” group of companies when considering technology stocks. These are Facebook holding company Meta Platforms Inc.
META,
Apple Inc.
AAPL,
Amazon.com Inc.
AMZN,
Netflix Inc.
NFLX,
and Google holding company Alphabet Inc.
GOOGL,
We can expand to a “FAANG+” group by adding Microsoft Corp.
MSFT,
and Tesla Inc.
TSLA,
because of their importance within the S&P 500, which is weighted by market capitalization.
Among the seven companies in the FAANG+ group, only Apple and Microsoft are in the information technology sector. Amazon and Tesla are in the consumer discretionary sector, while Meta, Alphabet and Netflix are in the communications services sector.
For our sales growth and profitability screen, we expanded the “tech stocks” group to include the 76 stocks in the S&P 500 IT sector, plus the five outside the sector that are part of the FAANG+ group above, along with three videogame developers for a total of 84 stocks.
FAANG+ Screen
Before showing the results of the full screen, let’s begin with the FAANG+ group. Here they are, ranked by how much their sales increased during their most recent reported quarters from a year earlier:
| Company | Ticker | Change in quarterly sales from year earlier | Gross margin | Gross margin – year-earlier quarter | Operating margin | Operating margin – year-earlier quarter |
| Tesla Inc. |
TSLA, |
37.2% | 23.76% | 27.35% | 20.25% | 19.53% |
| Amazon.com Inc. |
AMZN, |
8.6% | 42.60% | 39.72% | 10.84% | 9.67% |
| Microsoft Corp. |
MSFT, |
2.0% | 66.85% | 67.21% | 45.59% | 49.77% |
| Netflix Inc. |
NFLX, |
1.9% | 31.18% | 32.04% | 58.43% | 57.55% |
| Alphabet Inc. Class A |
GOOGL, |
0.3% | 53.11% | 56.09% | 28.78% | 33.44% |
| Meta Platforms Inc. Class A |
META, |
-4.5% | 78.63% | 81.15% | 40.33% | 43.36% |
| Apple Inc. |
AAPL, |
-5.5% | 42.96% | 43.76% | 33.23% | 35.65% |
A company’s gross margin is its net sales, less the cost of goods or services sold, divided by sales. Net sales are sales minus returns and discounts, such as coupons. The cost of goods or services sold encompasses the actual costs for making the items or providing the services, including labor. It is a useful measurement of pricing power, and a combination of an expanding gross margin and increasing sales is a good sign.
A company’s operating margin goes further, subtracting more overhead and other expenses that aren’t directly related to the production of goods and services sold. It is, essentially, earnings before interest and taxes (EBIT), divided by sales.
Among companies in the FAANG+ group, only Amazon improved both margins while increasing sales.
S&P 500 tech screen
Moving to the full screen of 84 tech stocks, as defined above, 31 of the companies improved their quarterly gross margins from a year earlier, while 26 also improved their operating margins. Among these, 24 also increased sales. Here they are:
| Company | Ticker | Change in quarterly sales from year earlier | Gross margin | Gross margin – year-earlier quarter | Operating margin | Operating margin – year-earlier quarter |
| Enphase Energy Inc. |
ENPH, |
75.6% | 42.29% | 39.57% | 24.36% | 16.64% |
| SolarEdge Technologies Inc. |
SEDG, |
61.4% | 29.34% | 29.05% | 13.92% | 9.08% |
| Monolithic Power Systems Inc. |
MPWR, |
36.7% | 58.22% | 57.61% | 32.36% | 25.70% |
| Fortinet Inc. |
FTNT, |
33.1% | 76.38% | 75.60% | 29.92% | 24.80% |
| Paycom Software Inc. |
PAYC, |
30.0% | 74.14% | 73.58% | 41.58% | 37.21% |
| Microchip Technology Inc. |
MCHP, |
23.4% | 60.09% | 53.35% | 48.96% | 46.39% |
| Analog Devices Inc. |
ADI, |
21.1% | 57.55% | 42.86% | 52.79% | 37.22% |
| ServiceNow Inc. |
NOW, |
20.2% | 78.40% | 76.58% | 13.35% | 8.98% |
| Ceridian HCM Holding Inc. |
CDAY, |
19.1% | 51.77% | 49.45% | 10.24% | 2.38% |
| Broadcom Inc. |
AVGO, |
15.7% | 63.47% | 60.39% | 58.19% | 57.28% |
| Salesforce Inc. |
CRM, |
14.4% | 72.29% | 64.43% | 26.44% | 15.17% |
| ON Semiconductor Corp. |
ON, |
13.9% | 47.75% | 43.75% | 39.45% | 34.33% |
| Hewlett Packard Enterprise Co. |
HPE, |
13.2% | 33.10% | 31.99% | 17.43% | 16.27% |
| Automatic Data Processing Inc. |
ADP, |
9.1% | 48.27% | 46.16% | 27.82% | 25.55% |
| NXP Semiconductors NV |
NXPI, |
9.0% | 53.80% | 51.69% | 38.68% | 36.76% |
| Autodesk Inc. |
ADSK, |
8.9% | 91.65% | 89.84% | 23.82% | 15.27% |
| Fiserv Inc. |
FISV, |
8.8% | 57.29% | 48.20% | 41.57% | 30.09% |
| Amazon.com Inc. |
AMZN, |
8.6% | 42.60% | 39.72% | 10.84% | 9.67% |
| VeriSign Inc. |
VRSN, |
8.5% | 86.32% | 85.49% | 69.66% | 68.89% |
| Amphenol Corp. Class A |
APH, |
7.0% | 32.03% | 31.10% | 24.20% | 24.08% |
| Ansys Inc. |
ANSS, |
5.9% | 90.61% | 89.03% | 43.04% | 41.42% |
| Broadridge Financial Solutions Inc. |
BR, |
3.0% | 23.57% | 22.06% | 16.94% | 15.22% |
| Electronic Arts Inc. |
EA, |
2.1% | 67.14% | 61.06% | 18.63% | 13.39% |
| PTC Inc. |
PTC, |
1.8% | 77.72% | 77.37% | 29.99% | 26.07% |
| Source: FactSet | ||||||
Click on the tickers for more about each company.
Read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
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