In 2022, after almost ten years of guiding the market upward, tech stocks hit a stumbling block due to growing interest rates and inflationary pressures. The Technology Select Sector SPDR ETF (NYSEMKT: XLK) has dropped 24% year to date, while the Nasdaq Composite is down roughly 26%.
But investment is a long game, and this sell-off gives long-term investors a chance to purchase shares in a number of the globe’s most inventive firms at a significant discount compared to where they stood only a few months back. Stocks in several of these firms are likely to aid investors in ultimately building their assets because they are essential to the world’s marketplace, have vast moats, and provide items that have low chances of replication.
As interest rates have risen, investors have been less willing to invest in companies with high price-to-earnings ratios (P/Es), and many equities have fallen in value. Lam Research (LRCX 0.51%), a manufacturer of equipment used in the semiconductor manufacturing industry, isn’t the case. Lam’s stock price decline mirrors the decline in the semiconductor market due to supply chain limitations. Forecasts predict that the wafer manufacturing equipment industry will increase rapidly over the next several years, from almost $90 billion in 2018 to $175 billion in 2027.
Semiconductors are prevalent, and evidence shows that the world will need them more as days pass. More semiconductors will be required for driverless cars, AI, and internet-connected devices in addition to PCs and smartphones.
Because of Lam’s enormous installed base of technology, the company has secured the loyalty of consumers not likely to switch to other brands. Since Lam also provides maintenance for such devices, establishing a closed-loop business system.
Last but not least, Lam offers a dividend yield of 1.5%. Lam is also buying back shares of stock to deliver value to investors. Lam’s BOD approved a USD 5 billion stock repurchase program in May. In light of the recent drop in semiconductor stock prices, this is a significant buyback effort, with a market valuation of under USD 55 billion. Lam Research is a leading company in a crucial area, and it trades at an appealing value, making it a promising long-term investment option.
Consider industry leader Intuitive Surgical (ISRG -0.77%), which makes robotic surgical gear, as an example of a company with cutting-edge goods and a similarly precise business plan. The number of procedures performed and the number of equipment owned by the Da Vinci Surgical System’s manufacturer are rising.
Increasing recurring revenue is the razor, and the higher-margin consumables and equipment changed for each process are the “blades.” The number of procedures performed from 2019 to 2021 increased by 14%, and a further rise of 11-15% is expected in 2022. In the meantime, Intuitive has increased income at a CAGR of 13%, with 75% of that income coming from regular customers.
Since the devices may cost up to $2.5 million and need substantial training, medical institutions will most likely not shift to a rival company’s products to save some cash after Intuitive Surgical has installed their equipment. Intuitive Surgical has a healthy financial sheet, which is an advantage. Because of the company’s strong margins, it generates a lot of money. The business can continue to function without taking on any new debt in the foreseeable future. Cash, short-term, and long-term investments brought the total to $8.2 billion as of the third quarter of 2021. That’s about seven percent of the company’s market worth as of right now.
Stocks of Intuitive have dropped 42% year to date, despite the company’s solid business structure, broad moat, and market positioning in a fascinating subject, mainly owing to similar factors that have afflicted tech companies generally. When compared to other companies, Intuitive’s value has always been higher. So, if you’re looking to diversify your holdings, the current pricing at 52-week lows may be a good time to buy shares of an industry-defining pioneer with a broad moat and an appealing business structure.
Consider Zebra Technologies (ZBRA 2.17 %). Even if you’re unfamiliar with Zebra, you’ve undoubtedly used some of its pioneering items, including barcode scanners and printers, mobile computers, or the RFID handheld. Though it may not seem riveting, this is a growing industry as the globe becomes more interdependent.
Zebra’s software division is expanding, so the company can better support its hardware solutions and play an even more prominent role in its clients’ activities. Profit margins at Zebra Technologies have remained relatively stable over the last 15 years. The company’s history of mergers and acquisitions means that there are typically substantial changes to be made to the business, making it less stable than its competitors. Zebra’s recent change in emphasis from hardware to software could help the company’s profitability expand over the next decade. At Zebra, software engineers have surpassed hardware engineers as the company’s largest employment group. This gives Zebra a tenacious business strategy, making it unlikely that consumers would defect. Zebra’s customer base comes from various industries, including retail, e-commerce, healthcare, hospitality, logistics, and more. For three consecutive years, Zebra has been placed at the top of Gartner’s Magic Quadrant analysis for indoor location services.
In Q1 of 2022, Zebra repurchased about $305 million in shares. Similar to Lam Research, Zebra stock is selling at a relatively low price. Stocks are trading at a reasonable 15 times projected earnings, and after falling 52% off their 52-week peak, they are holding a little above their 52-week low. This makes the current moment a suitable access point for this leading company.
Zebra uses its resources effectively. In most cases, putting money into the company from the inside is the best option. They are willing to make purchases if the opportunity presents itself and the rate of return is satisfactory (the “hurdle rate”). The target leverage ratio for the corporation is between 1.5 and 2.5 times debt to adjusted EBITDA; the current ratio is about 0.8, leaving plenty of flexibility for further purchases. Large purchases will be considered if the price is appropriate, with stock being used as payment if the opportunity is too big to be financed by debt.