2 Tech Stocks I'd Load Up on Today and 1 I'd Avoid Until Further Notice

Over the past decade, tech stocks have been the go-to for many investors because of their performance and growth potential. The S&P 500's tech sector is up 771% in the past decade (as of Aug. 21), outperforming every other sector by a decent margin.

Many investors have tech exposure through major indexes like the S&P 500, Nasdaq Composite, or Dow Jones, but if you're looking for two individual tech stocks to add to your portfolio, Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT) are two I would load up on. Tesla (NASDAQ: TSLA), however, is one I'd avoid. Let's take a look at the case for each.

Image source: The Motley Fool.

Don't underestimate the importance of diversification

One thing Amazon and Microsoft have in common, and why I'm high on both companies for the long term, is their diversified businesses. Amazon is a household name because of its e-commerce business, but it's far from its only work. It has cloud provider Amazon Web Services (AWS), Prime Video, advertising, Whole Foods, and even a pharmacy arm.

Microsoft is known for its Office software (Excel, Word, Teams, Outlook, etc.), but it also has its own cloud platform (Azure), its Windows operating system, hardware, Xbox, LinkedIn, advertising, and GitHub.

Having a foundational business -- Amazon with e-commerce and Microsoft with software -- is important for reliable cash flow and brand recognition, no doubt. However, multiple businesses and revenue streams can help sustain growth, even when a particular economic cycle isn't in your favor.

Cloud's importance will only increase

Both Amazon and Microsoft are known for other businesses, but there's a strong case that cloud computing is the most important business for both companies. AWS and Azure are the world's two largest cloud platforms, with market shares of 28% and 21%, respectively, as of the end of the first quarter.

Although e-commerce accounted for 79% of Amazon's $200.6 billion in revenue in the second quarter, AWS accounted for 61% of its operating income (profit from its core operations) while accounting for only 21% of its revenue. E-commerce generates the revenue needed to fund investments and expansion; AWS generates the profits.

Cloud remains Microsoft's main growth driver. In its most recent quarter, Microsoft's "Intelligent Cloud" segment (which includes Azure) brought in $39.3 billion in revenue, up 32% year over year. In Microsoft's latest fiscal year (ended June 30), Azure achieved its first $100 billion year, and the Microsoft Cloud segment as a whole brought in $214 billion. For perspective, Meta Platforms as a whole has generated just over $228 billion over its past four quarters.

Cloud was already a growing industry, but its importance will only increase as artificial intelligence advances and the world increasingly moves to cloud-native operations.

Both Amazon and Microsoft are spending hundreds of billions building out their data center and AI infrastructure, and although it will be a while before we get a true sense of the return on investment, I expect them to command the top two spots in the cloud world for the foreseeable future.

Why I wouldn't touch Tesla's stock right now

It hasn't quite been Tesla's year, with the stock down over 16% year-to-date as of Aug. 21. It's the worst-performing "Magnificent Seven" stock this year, and I would be surprised if it didn't finish the year that way.

Tesla has some positives, but one major reason I'm avoiding the stock is its valuation relative to the execution timeline for long-shot projects like robotaxis and humanoid robots. At the time of writing, Tesla is trading at over 205 times its projected earnings for the next 12 months.

That's hard to justify for any company, but especially one burning through cash and a stalling core business (vehicle sales). Right now, I'd rather invest in a tech company with a thriving core business, such as Amazon or Microsoft.

Stefon Walters has positions in Microsoft. The Motley Fool has positions in and recommends Amazon, Meta Platforms, Microsoft, and Tesla. The Motley Fool has a disclosure policy.