The best tech stocks are rarely cheap in bull markets. But even as the broader market hovers near its all-time high, a handful of high-quality company stocks have stumbled, for reasons ranging from regulatory scrutiny to geopolitical fears. What do they all have in common? These companies dominate their respective industries.
That’s no guarantee of their future success, but with some great stocks, the only time you have a chance to buy cheap is when short-term misfortunes strike.
Do you miss the morning spoon? Wake up with Breakfast news in your inbox every market day. Register for free »
Below are three top tech stocks that are currently in the bargain bin because they carry some extra baggage. All three companies are positioned for long-term growth that more than justifies their current valuations. Consider purchasing them while they are discontinued, as they likely won’t remain as cheap once the storm clouds clear.
There has been a lot of buzz surrounding the internet search giant since the company lost an antitrust case in early August Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG). Regulators are pushing for a forced sale of the Google Chrome web browser and rules against deals that protect video platform YouTube and artificial intelligence (AI) app Gemini from competition.
Alphabet makes most of its money from digital ads it shows on Google search results and in videos on YouTube, so the thought that competitive pressure on its advertising business could increase has kept its stock price low. Alphabet now trades at a forward price-to-earnings ratio of just 20 times expected earnings, a bargain for a company that analysts estimate will grow its earnings by an average of 17% to 18% over the next three to five years.
Changes are coming for Alphabet, but investors may be overreacting. Chrome’s value if sold is estimated at around $20 billion, which would be a nice influx of cash for Alphabet. And the proposed restrictions could narrow the playing field, but Google could remain a big winner regardless. Meanwhile, Alphabet’s cloud activities are becoming an increasingly important part of the company. Investors can look back on this period of uncertainty about Alphabet’s future as a buying opportunity.
The United States and China are engaged in an AI battle that… ASML Holding(NASDAQ: ASML) in a precarious position. The Dutch company is the world’s only manufacturer of extreme ultraviolet lithography (EUV) machines capable of producing the types of high-end chips that AI applications require. The U.S. is pressuring ASML, the Netherlands and the European Union to block sales of those machines to China, which has been an important market for ASML.
These geopolitical pressures have caused the company’s shares to fall nearly 40% from their summer highs. Last month, ASML shocked the market with lukewarm expectations. Chinese customers aggressively ordered machines even before any restrictions. ASML’s guidelines indicated that the wave of orders was cooling down.
The semiconductor industry is cyclical and ASML’s activities appear to be in a softer phase. But that doesn’t change the fact that it has a monopoly on EUV machines, and long-term innovation in chips is likely to drive healthy demand for those machines. Analysts estimate that ASML’s profits will grow 16% to 17% annually over the next three to five years. That growth rate would make ASML a solid deal at its current valuation of 32 times earnings.
Taiwanese semiconductor(NYSE: TSM) is in a similar situation. The company is the world’s largest chip foundry (manufacturer), accounting for approximately 62% of the world’s third-party semiconductor production. It is a mission-critical operator in the world’s technological landscape. However, it is a Taiwanese company. China has long claimed the independently governed island as a province of the mainland and has signaled its intention to bring it under Beijing’s control – by force if necessary.
It is unclear whether the situation will escalate into armed conflict, although Taiwan’s economy, including Taiwan Semiconductor, makes it a strategic asset that China would like to have. The United States has historically helped Taiwan with trade and is working with Taiwan Semiconductor to begin diversifying its manufacturing footprint to locations outside Taiwan. The company is investing more than $65 billion in building factories in Arizona.
Investors shouldn’t ignore the risk that China’s aggression toward Taiwan could escalate, but at some point this stock’s value proposition becomes hard to ignore.
Taiwan Semiconductor today trades at a price-to-earnings ratio of 27. That may seem high, but analysts expect Taiwan Semiconductor to grow earnings at an average annual rate of 31% over the next three to five years. Remember, Taiwan Semiconductor produces most of the high-quality chips that power AI applications, including those designed by Nvidia. Taiwan Semiconductor’s stunningly low valuation relative to its estimated growth makes the stock worth considering despite the geopolitical risks.
Before you buy shares in Alphabet, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Alphabet wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $833,545!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. TheStock Advisoris on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns November 25, 2024
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends ASML, Alphabet, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
3 Top Tech Stocks to Buy Now was originally published by The Motley Fool
