Forget the timing of the market bottom, these 3 tech stocks are fantastic business


The bear market has been brutal this year, although companies have continued to report rising revenues and profits. Nonetheless, the focus has shifted to the financial outlook for 2023, a possible recession, and a US Federal Reserve “pivot” in which it halts (or slows) its record pace of interest rate hikes.

Many investors are specifically looking for this Fed pivot as a sign of a market bottom, holding off their stock purchases until it happens. But there is no guarantee that this would mark the bottom of this bear market.

In the meantime, there are deals to be had right now, especially if you plan to buy and hold for at least a few years. If this is your case, three Fool.com contributors think The trading post (NASDAQ: TTD), Search Lam (NASDAQ: LRCX)and Broadcom (NASDAQ:AVGO) are fantastic deals right now.

Yes, The Trade Desk is already recovering. No, you haven’t missed the mark.

Anders Bylund (The trade office): If you insist on identifying the exact bottom of the market with every investment, I’m afraid The Trade Desk is not for you. The stock has already rebounded more than 40% from July’s two-year lows.

Investors with more realistic expectations should always feel free to hire the online marketing automation specialist. The Trade Desk is still lying around in the bargain bin on Wall Street.

The Trade Desk is also trading more than 50% below all-time highs from last November. At the same time, free cash flow and revenue are only growing, as the graph shows.

Data by Y-Charts.

The digital advertising industry is currently in a deep recession as advertisers around the world cut their marketing budgets in response to soaring inflation rates around the world. Despite this, The Trade Desk posted year-over-year revenue growth of 35% and higher profits of 11% in the August second quarter report. Again, the company produced these robust results while in the depths of an industry-wide downturn.

Now imagine what The Trade Desk will be able to do when the advertising industry sees the sunlight again. You don’t want to sit on the sidelines when The Trade Desk’s stock chart turns up the heat. The 40% surge you’ve missed in the past two months is easily overlooked when you watch multibagger returns over the next five to 10 years.

This bargain-priced semi-stock could make a big rebound

Billy Duberstein (Lam search): Semiconductor equipment maker Lam Research reported earnings last week, easily beating analysts’ expectations while guiding well above expectations for the December quarter. And yet, the stock remains at more than 50% of its highs and is trading in single digits Multiple P/E.

This may be because management expects front end equipment spending for wafers to decline by just over 20% next year from this year’s record highs. The memory market is in a steep decline, and demand for logic chips used in consumer electronics like PCs and cell phones is also weak. New regulations preventing the sale of some high-end equipment to China are also weighing on the outlook.

Of course, this is not the first time that investment in semiconductor equipment has fallen. In 2019, the industry experienced a sharp downturn. That year, Lam Research’s revenue fell by about 13% and its operating profits fell by about a third.

While this might be thought to mean next year’s revenue and profit will decline further, note that Lam generated more than 37% of its revenue from its service and parts business last quarter. . Services revenue is somewhat tied to the installed base, which is expected to continue to grow.

This means that this part of the income has a chance to grow next year. Even if it goes down, it will be a much smaller drop than equipment revenue. Thus, revenues should be less down than the drop in overall industry capital spending.

Assuming Lam earns $10 per share next quarter, as he indicated, he would earn about $36.65 in calendar 2022. A one-third drop in earnings similar to 2019 would bring 2023 EPS to around $26.

Still, with the stock already trading in the $300s, that’s already a lower multiple than the teens on what should be bottoming out in earnings and just a single-digit multiple of this year’s earnings. After the 2019 downturn, Lam’s operating profit grew by around 125% over the next three years.

LRCX EBIT Chart (TTM)

Data by Y-Charts.

While the semiconductor industry tends to experience highs and lows, the troughs are generally shorter and the overall trend is long-term growth. While no one knows how long this decline will last, the last time Lam traded at this valuation was at the end of 2018. Investors who bought this decline were indeed rewarded handsomely.

Don’t Miss This Dividend-Paying Chip Stock

Nicholas Rossolillo (Broadcom): Shares of chip design juggernaut Broadcom have been beaten 35% this year. It does better than the average chip stock (the iShares Semiconductor ETF is down 43%), but Broadcom’s stock decline is still impressive.

This is a business is growing rapidly. In the first nine months of fiscal 2022, revenue grew 21%, and free movement of capital is up 20%.

Which give? The focus shifted to Broadcom’s proposed blockbuster acquisition of a cloud computing company vmware. Broadcom has had great success acquiring software companies in recent years, but this one would break records. If the deal goes ahead (expected in 2023), Broadcom will get its hands on this cloud infrastructure and software business for $61 billion (based on Broadcom’s share price at the time of the announcement) . The deal will be funded with approximately 50% cash and 50% new Broadcom stock.

Mega deals like this can be tricky to pull off. Regulators may put a stop to it (although Broadcom remains confident they will approve the merger). Then there’s also VMware’s integration business into Broadcom’s existing software segment, which consists of various infrastructure monitoring and security products. However, in the third year following the merger, Broadcom estimates that the combination will add $8.5 billion per year to EBITDA (earnings before interest, taxes, depreciation and amortization).

The catch here is that Broadcom expects to have to raise another $32 billion in debt to fund its acquisition. The company has managed its debt well and made additional profits from its buyouts in the past, but that would be another big chunk added to the company’s liabilities. By the end of July, Broadcom already had $39 billion in debt on its books.

All of which would explain the stock’s tumble this year, as investors weigh in on the chip design giant’s future shares. In the meantime, the bear market has left Broadcom trading for just 12 times the free cash flow of the past 12 months. The shares also pay an annualized dividend of 3.8%, and management also just announced a new $10 billion share buyback program. For the moment, Broadcom does not run out of money and returns this surplus to the shareholders. The pending VMware deal leaves some question marks, but for now, Broadcom’s stock looks very cheap.

10 stocks we like better than The Trade Desk
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* Portfolio Advisor Returns as of September 30, 2022

Anders Bylund holds positions within the Trade Desk. Billy Duberstein has positions in Broadcom Ltd, Lam Research and The Trade Desk and has the following options: January 2023 short sale of $320 on Lam Research. Nicholas Rossolillo holds positions at Broadcom Ltd and The Trade Desk. The Motley Fool fills positions and recommends Lam Research and The Trade Desk. The Motley Fool recommends Broadcom Ltd and VMware. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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