Tech stocks have rebounded lately, but certainly not to where they were at the start of January. Amid the rout, some high-quality tech names have now been completely discounted.
This presents an opportunity for those who may feel fear but can look beyond the short-term bumps in the economy. At their discounted prices, the following top tech stocks look quite attractive today.
When everyone was selling it last week I was buying stock in parent Facebook Metaplatforms (NASDAQ:FB). That’s not to say Meta doesn’t have real problems. Forecasts of revenue growth between 3% and 11% for the next quarter have marked a sharp deceleration, and competition from Tik Tok is a real concern. Additionally, user growth appears to have stalled in the US and Europe, and even the “rest of the world” segment has seen a sequential decline in monthly active users (MAUs). And Meta still faces intense public scrutiny, especially after last summer’s whistleblower Frances Haugen testified before Congress.
So why invest in a company with all these problems? Basically, after its post-earnings plunge, Meta is a really, really cheap value stock. Its P/E ratio now sits at an attractive level of 17 times trailing earnings. However, Meta stock is actually even cheaper than it looks.
Like some other large-cap tech rivals, Meta has both its profitable core business and new venture Metaverse, which it currently burns through billions of dollars every quarter. However, if Metaverse losses are removed, Meta made $57 billion in operating profit last year. Assuming a 20% tax rate, that’s $45.6 billion in net income in its core business.
Even with more modest revenue growth expectations, this figure should easily exceed $50 billion in 2022. It should be noted that the first half of 2022 will likely be lower growth than the second half, as That’s when Meta results exceed quarters before iOS privacy changes. rules that have limited targeting capabilities. The results should therefore improve later in the year.
Meanwhile, Meta’s market capitalization has fallen to just $634 billion at the time of this writing, and an enterprise value of just $586 billion after removing the additional $48 billion from Meta. So its EV/earnings ratio for its core business in 2022 is probably around 11. That’s what one would expect from a low-growth bank or a declining media company, not a cutting-edge technological action pushing new frontiers.
Of course, Metaverse spending may not pay off for years. But given the technological expertise of this company, it seems unlikely that there will be no gain in the future. Yet, even if one assigns zero value to the Metaverse business, Meta is a cheap stock on the merits of its major social media platforms alone.
Another laggard in large-cap tech was Amazon (NASDAQ:AMZN). Unlike Meta, Amazon jumped after its recent earnings report, but the shares really haven’t budged for the better part of two years, even as other FAANG rivals rose.
Investors are likely to have issues with Amazon’s weak overall profitability, as well as tough comparisons to the pandemic year’s e-commerce boom. On the surface, this turned out to be true. Amazon’s online store sales actually fell 1%, or rose 1% when adjusting for exchange rate headwinds last quarter. Third-party seller services grew just 12%, and overall revenue grew just 10%, adjusted for exchange rates — a very low rate for growth-focused Amazon. Meanwhile, the company’s total operating profit fell year-over-year due to rising costs and investments in execution.
However, I would say that e-commerce is now the least important part of Amazon’s business. The most important? Amazon Web Services, the world’s leading cloud computing platform. Last quarter, AWS revenue grew 40% and now stands at $71 billion. AWS operating margins also increased year-over-year, with AWS operating profit up 46% to nearly $5.3 billion, or more than $21 billion. dollars on an annualized basis.
With a market capitalization of $1.6 trillion, Amazon currently trades at less than 80 times the operating profit of AWS. That would be expensive, but not exactly a crazy price to pay for this top-notch tech company with a decade of strong growth ahead of it. So you could say that investors are getting Amazon’s core e-commerce ecosystem for free, when they remove AWS. Additionally, Amazon just released its high-margin ad revenue for the first time last quarter, revealing nearly $10 billion in quarterly ad sales growing at a hefty 33%. This segment is probably also very valuable.
So while Amazon’s current revenue and earnings are hurt by a deceleration in e-commerce and rising costs as it continues to build out its vast delivery infrastructure, the stock still looks pretty cheap based on the sum of its parts. It’s a buy, even after its post-earnings surge.
Finally, manufacturer of semiconductor equipment Search Lam (NASDAQ: LRCX) also looks like an attractive buy this month. Shares of Lam fell slightly after its recent earnings report, in which revenue was a little weaker than expected, although earnings per share beat expectations. Lam also gave soft guidance for the next quarter, pointing to sequential declines.
This may surprise some, given that we are still in a small shortage of semiconductors and global foundries are investing all they can to meet demand. This should lead to an explosion in equipment sales for companies like Lam, not a decline.
Unsurprisingly, Lam’s management attributes the current shortfall to supply constraints, which prevents Lam from meeting booming demand. Lam’s sales are therefore likely only deferred, not lost. Management expects the situation to improve in the second half of the calendar year and growth to be much better than in the first half. Even third-party research firm VLSI expects front-end wafer equipment sales to grow 23% this year, on top of a record high in 2021.
Amid the tech rout, Lam is trading at just 15.9 times 2023 earnings estimates (its fiscal year ends June 2023). Yet management continues to reward shareholders with large share buybacks and a rising dividend that now yields around 1%.
Meanwhile, Lam has just unveiled what he calls “breakthrough technology” in selective etching and deposition equipment. The newly introduced tools will allow chip makers to stack transistors vertically, which is the next frontier of chip innovation. Current chips have packed almost as many transistors onto a silicon wafer as physically possible, so 3D stacking is likely where future breakthroughs lie. Lam is a specialist in 3D stacking, so it is well positioned for the next wave of semiconductor growth, while trading at a lower multiple than the market.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.