Tech stocks have been investor darlings in recent years. And I’m not just talking about the race to digitize during the pandemic either. The trend is visible over the last ten to fifteen years at least.
Many of the mega-players and household names today actually assumed that status during this time. Of course, a number that were considered mainstays back then are not considered so great today. And still others exist today only within the framework of the major players who absorbed them. It is therefore one of the most active sectors.
The main thing that has propelled technology companies to their position of pre-eminence is their ability to innovate. Businesses of all kinds need to increase efficiency on their way to maximizing profits. And technology is a great enabler. Therefore, as we take stock of the latest market trends, it makes sense to think about the best tech stocks.
Not much has changed since yesterday’s July 4 holiday: The Fed is staying the course with its rate hikes, which essentially makes it more expensive to run a business, which then raises prices in a way that turns away consumers, which ultimately causes sellers to lower prices. This is how inflation is traditionally fought.
But not all products can be diverted. Oil, for example, is holding above $110, and that continues to fuel inflation. Therefore, there is concern that if things continue as they are, simply lowering prices will not help manufacturers. They would also have to cut production, which would then send us into a recession.
Either way, now is actually a good time to buy tech stocks because you may be able to buy below intrinsic value. A large number of technology stocks are classified in the growth category, meaning that you must bet large sums on their potential for future growth. In a bull market, this could turn into a lot of money and increase your risk.
But in a market like this, investors tend to get their money out of risky bets quickly, which means those same growth stocks are likely to be a bit cheaper. And it’s a perfect entry point.
But not all technologies are the same. Platforms facilitating e-commerce, for example, have had excellent business over the past two years, but are expected to experience difficult compositions as well as increased competition from physical stores for the rest of this year. So there could very easily be a further decline in stock prices. Gaming and entertainment platforms may also experience mixed quarters as consumers try to cut spending due to rising inflation and Fed corrective measures.
On the computing side, global PC shipments are expected to decline more than 8% this year after a few years of double-digit growth. Tablet shipments are expected to drop more than 6%. While growth is expected to return next year, it is not expected to be substantial. Significant reductions in consumer demand and education cannot be fully offset by the resurgence of commercial space.
The server market is changing, according to IDC, “as server hardware profit pools continue to shift from capex to opex, from traditional core to cloud-enabled edge, and from enterprise to service provider.” Although this segment has been relatively more resilient than IT, it has its own share of challenges, mostly related to the supply chain, so pent-up demand is expected to keep the market strong through 2023.
The auto market is also expected to contract at a double-digit rate this year, with supply chain issues far outweighing demand.
Due to the above, it might not be such a good idea to invest in the gadgets/products that use semiconductors, but rather to focus on the very important semiconductors themselves that , while being limited in supply and slightly affected by the war in Ukraine (for important components), remains in very high demand. Semiconductor manufacturers and those who supply them with key technologies are therefore also good bets.
Here are some examples. In addition to all the details I’ve provided below, all three are Strong Buy stocks (Zacks #1 Rank).
Broadcom Inc. (AVGO – Free report)
There are a number of exciting things happening at Broadcom, which makes semiconductors and complex digital and mixed-signal analog products.
The company has grown through a large number of strategic acquisitions. The latest is VMware, which is the primary enabler of virtualization and therefore of great strategic importance. It will significantly boost its software business, enabling it to offer business-critical platform solutions.
Broadcom’s growth potential is evident from its growing backlog, which has increased significantly over the past quarter. The hardware backlog grew by $4 billion to $29 billion, while the software backlog grew by a billion to $15 billion.
Management also said delivery times seemed to be getting longer and channel inventories were lean. They explained how enterprises, service providers and hyperscalers preferred Broadcom over proprietary offerings (a continuing trend) and how broadband infrastructure (spending should be multi-year) was a big driver.
On the industrial side, strength was seen in electric vehicles, renewable energy, factory automation and healthcare. It expects semiconductor revenue growth of 31% in the current quarter. Including software, growth should reach 24%.
In the last quarter, Broadcom beat the Zacks consensus estimate by 4% and the average estimates for 2022 and 2023 also rose by about 4% each over the past 60 days. Analysts currently expect revenue and profit growth of 20% and 32% respectively this year, followed by further growth the following year.
The fact that Broadcom is trading at just 13.2x earnings (below the S&P’s 16.4x and its own median level of 18.4x) makes this an absolute steal.
Nova Ltd (NVMI – Free report)
Nova provides metrology (measurement) tools used in semiconductor manufacturing, including lithography, etching, chemical mechanical planarization, deposition, electrochemical plating and advanced packaging processes. It serves logic, foundry and memory manufacturers, as well as process equipment manufacturers.
Given the current strength in demand for semiconductors, it’s not hard to see why Nova would be an attractive game right now. But the company’s strength is in its product line that allows it to meet the growing complexities of manufacturing ever-smaller semiconductor devices.
And the success of its offerings is evident in the growth it is seeing across all geographies. While Taiwan, Korea and China are large markets where it continues to gain share, the growing demand for onshore manufacturing in Europe and the United States, which gave rise to the EU Chip Act and the US CHIPS Act, only increases its opportunities.
Therefore, it is not surprising that the company continues to increase its backlog even though it remains on track to achieve growth of around 50% this year. Nova continues to increase its production capacity in Israel, Germany and the United States to meet the strong demand it is seeing.
Last quarter, Nova beat Zacks’ consensus estimate by 24%. Over the past 60 days, its estimate for 2022 has risen around 11% to $4.65. It is expected to increase revenue by 30% and profit by 21% this year.
Nova is priced at 19.1X earnings, which looks a bit expensive compared to the S&P 500, but the multiple remains below its median level of 29.9X over the past year.
Globalfoundries, Inc. (SFP – Free report)
Globalfoundries is a semiconductor foundry offering a wide range of semiconductor devices, as well as a range of wafer manufacturing services and technologies.
About half of revenue comes from mobile devices, which grew 28% in the last quarter with increased demand for feature-rich phones. The communications infrastructure and data center markets account for approximately 17% of revenue and grew 80% in the last quarter, driven by increased shipments, average selling prices (ASP) and sales. a better combination with the ramp-up of data centers and the continued construction of 5G infrastructure.
Home and Industrial IOT grew 55% and contributed another 17% and again Globalfoundries benefited from volume, price and mix. Auto grew 170% from a small base.
The design is winning with both new and existing customers and its long-term customer agreement provides revenue visibility. As a result, capacity expansion plans continue with the construction of the new Singapore factory on target to install tools this quarter and start production in the first half of 2023.
Analyst estimates aren’t far off either. After Globalfoundries beat the Zacks consensus last quarter by 75%, the 2022 estimate jumped 21%. Revenue is expected to rise 21% this year as the 5 cent loss per share last quarter turns into a profit of $2.30.
At 2.6 times the sell, the stock isn’t exactly cheap, but it’s cheaper than the S&P 500, which is trading at 3.3 times the sell. NVMI’s median level over the past year is also higher at 3.83X. So it may be worth considering.
One month price performance
Image source: Zacks Investment Research