The Nasdaq Composite index appears to be clawing its way out of bear market territory after an atrocious 2022. The tech-heavy stock index has been up nearly 20% at times so far in 2023 as investors eye an end of corporate profit declines, perhaps by the end of this year.
In contrast to this warming market outlook, the media seems to be pushing an economic recession narrative. After more than a year of rampant inflation, consumer and business spending has taken a hit, and economic activity could slow to a crawl in 2023.
The conflicting narratives are likely to cause plenty of dips and bumps in stock prices. As always, buying these dips in quality businesses and holding for the long term can set up investors for great success. After all, investing is all about focusing on the future potential of stocks, not the past or the present situation.
Three Fool.com contributors think Snowflake (NYSE: SNOW), Applied Materials (NASDAQ: AMAT), and Infineon (OTC: IFNNY) are worth buying on any dips due to recession fears. Here's why.
Everybody knows: All Snowflake needs is a price dip
Anders Bylund (Snowflake): Put some Leonard Cohen music on the turntable and get something appropriate to drink. A recession is looming and we need to set the mood. The rising consumer prices and inflation-fighting policies are pushing the economy to the edge. Everybody knows it and is preparing in their own way.
For the astute investor, though, it's not necessarily a sad music situation. True, that final step across the threshold to a technical recession will probably weigh on the stock market as a whole and bring everybody down. It's likely to be tough on high-priced growth stocks in particular -- even if their long-term business prospects are as bright as ever. But astute investors know this spells an opportunity to buy those top-quality growth stocks while they're more affordable (at least for a while). In particular, I can't wait to pounce on data warehousing and analytics expert Snowflake when the time comes.
I'm here to tell you that while the recession may cast a shadow on the market, it won't destroy Snowflake. The company's advancements in artificial intelligence, its plethora of strategic partnerships, and its open attitude to helpful acquisitions reveal a company with robust long-term prospects.
So, what's the game plan? Wait for the recession to hit, and keep an eye on Snowflake. As prices drop due to market uncertainty, astute investors can take advantage of the dip to add this high-growth company to their portfolios. The stock's current lofty price tag is the chief reason why I haven't included Snowflake in my own portfolio yet.
Snowflake is an emerging leader in the data warehousing industry, which may struggle through economic challenges but come out on the other side to face an enormous and growing demand for those valuable data management services. A recession won't change that. So you might as well pick up some Snowflake stock at a more affordable price while you have the opportunity. We're not there yet but you can feel it in the air. The dip is coming soon.
As Mr. Cohen would say, "That's how it goes. Everybody knows."
A chip fab equipment leader bucking negative industry trends
Nicholas Rossolillo (Applied Materials): Chip fab equipment companies -- the businesses that make the heavy machinery used to manufacture chips -- harbor a special place in the tech world. These modern industrialists have an oligopoly that controls the pace of chipmaking technology, and they're highly profitable as a result. They're also a top indicator of when a semiconductor industry (and general economy) slump is beginning, and when it's coming to an end.
Applied Materials has the broadest portfolio of chipmaking equipment. This canary in the coal mine was getting suffocated by the bear market of 2022 ahead of what is now broadly recognized as a semiconductor industry downturn, led by sharp smartphone and PC sales declines. But as the downturn tries to find a bottom, Applied's health is now improving. Management is actually predicting its business could have a solid year of growth, even as some of its peers try to slog through economic woes.
Applied is predicting strength due to a big backlog of orders from "mature" chip manufacturers, particularly those geared toward the auto industry. Applied has also released a couple of new machines aimed at advanced chip production for applications like AI.
Through this nasty stretch of stock performance, Applied kept raking in the cash -- and generously doled all of it out to shareholders, primarily via share repurchases. But to reinforce its outlook for sunnier skies ahead, management recently increased its quarterly cash dividend by 23% (making for an annualized dividend yield of 1.1%), and it authorized a new $10 billion stock repurchase plan (currently worth 10% of the company's current market cap).
Applied Materials stock trades for less than 16 times trailing-12-month earnings, or 25 times free cash flow. This looks mighty cheap to me for a top semiconductor business with years' worth of profitable growth ahead of it. I'm a buyer of the dips in 2023.
This European auto chip giant just raised its full-year guidance
Billy Duberstein(Infineon Technologies): If the economy heads into a recession, it would likely be a negative for both automotive and semiconductor stocks. That's because each of these industries is perceived as quite cyclical.
But the semiconductors that go into automobiles? Those are actually more of a pure growth story. That's because as vehicles become electrified and more autonomous, their semiconductor content will grow by leaps and bounds per unit.
Right now, a typical internal combustion engine requires about $500 of semiconductors per unit, while battery-powered electric vehicles (EVs) require about $1,000. And by 2027, it's projected that EVs will reach $1,500 of semiconductors per vehicle. So with electric vehicles only at 13.4% penetration globally, that's a lot of room for growth. No wonder McKinsey projects automotive chips to be the highest-growth subsector of the semiconductor market through 2030.
Even better, many of the semiconductor companies that make power chips for electric vehicles also have complementary offerings for electric power generation and transmission, which is needed to update electricity grid infrastructure as renewables grow.
One leader in this field is Europe's Infineon Technologies, which has been a strong beneficiary of these trends. In 2021, Infineon had far and away the No. 1 market share globally in power semiconductors and discrete chips, along with the No. 4 position in microcontrollers. Those types of chips make up about 85% of its portfolio, with another 10% in radio frequency chips and sensors, and another 5% in memory-integrated chips. About 45% of Infineon's revenue comes from the automotive market, with 13% from industrial power control systems, 29% in power and sensor systems, and 13% in connected secure systems.
So, you'll find Infineon's chips in just about any device that requires energy-efficient power conversion, from EVs, to the modern grid, to the industrial Internet of Things, to artificial intelligence data center servers, to mobile phones and PCs.
Moreover, the company has been executing phenomenally. In fact, Infineon just pre-announced its second-quarter results, with management saying revenue will now be above 4 billion euros, well exceeding its prior guidance for 3.9 billion euros, with segment operating margins in the high-20% range, as opposed to initial guidance of 25%. Based on strong performance to date, the company now expects its full-year revenue to meaningfully exceed prior full-year guidance of 15.5 billion euros.
Meanwhile, Infineon trades at a very reasonable 19 times trailing earnings and 15 times forward earnings estimates right now. That's an undemanding valuation for a company that expects to grow at a 10% rate through the cycle, with strong segment operating margins of 25% or more.
With a leading position in multiple end markets, Infineon is a solid stock to pick up on any dip related to recession fears.
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Anders Bylund has no position in any of the stocks mentioned. Billy Duberstein has positions in Applied Materials. His clients may have positions in the stocks mentioned. Nicholas Rossolillo has positions in Applied Materials. His clients may have positions in the stocks mentioned. The Motley Fool has positions in and recommends Applied Materials and Snowflake. The Motley Fool has a disclosure policy.
