The technology sector has had a rough go of it lately due to inflation and macroeconomic fears, but there's no better way to combat inflation and increase productivity than technological innovation. When many are throwing out "risky" stocks, it can open up big opportunities for longer-term investors.
The following two tech stocks aren't household names, and therefore may be hit more than warranted when the market sells off. But at their current beaten-down prices, they could also be long-term gems in your portfolio.
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Synaptics
Given the current shortages in the labor market and the advances in microchip technology, we may be on the cusp of the Internet of Things (IoT) really taking off. One great way to play the IoT revolution is with chipmaker Synaptics (SYNA -1.53%).
CEO Michael Hurlston took over the CEO role in 2019 after a long stint at Broadcom and then briefly as CEO of Finisair before it was acquired in 2019. Under Hurlston, Synaptics has made three consequential acquisitions. These included the purchase of Broadcom's IoT business DisplayLink, a leader in video-compression technology, and DSP Group, Inc., which was named after the term "digital signal processing," or chips that convert the physical world to digital signals, and vice versa.
With the acquisitions, Hurlston has positioned Synaptics, which used to be a mere producer of PC touchpad chips, as an Internet of Things powerhouse. Today, the company gets 62% of revenue from IoT applications, with the rest almost evenly split between PCs and mobile.
Based on recent results, the strategy seems to be working. Although revenue is still below where it was a few years ago due to the divesting of low-margin businesses, Synaptics' gross margin has rocketed from the mid-30% range just two years ago to 51.8% over the recent 12 months.
Margins look like they're still climbing, with GAAP gross margin in the December quarter coming in at 53.5%. Revenue was up a solid 18% in the recent quarter, and management expects revenue to accelerate 42% next quarter -- albeit with new contributions from DSP Group.
Automation from the Internet of Things looks like a key way for businesses to beat inflation, and Synaptics' business improvement is bearing fruit. At just 16 times forward earnings, it's an under-the-radar tech stock to buy this year.
Kulicke & Soffa
Amid fears of inflation and rising interest rates, investors may also be looking at low-multiple stocks that generate cash and earnings today. Another under-the radar name that fits that bill is Kulicke & Soffa (KLIC 1.40%), a global leader in advanced-packaging equipment.
Kulicke & Soffa is just about the cheapest stock you'll find today in the semiconductor space. It trades at just 7.2 times earnings, which is cheap. But when you subtract the extra $808 million in cash on its balance sheet, or about $12.75 per share, the stock is trading around 5.4 times earnings.
After years of underinvestment from 2018-2020, advanced-packaging demand is booming along with semiconductors. The accelerated digitization of the economy coming out of the pandemic made for an incredibly strong 2021 for Kulicke & Soffa, during which time the company set records for revenue and earnings. Obviously, its low valuation today indicates investors are fearing a cyclical downturn.
However, management has guided for slightly higher 2022 revenues than 2021. But that estimate incorporates headwinds from the supply shortage in the market, and management has a history of being conservative in its guidance. So the cash should keep pouring in for the foreseeable future.
Looking out to 2024, management recently said it's ahead of the innovation plan outlined at its investor day last summer. That plan includes building up next-generation tools such as thermal-compression bonding, as well as advanced mini and micro LED displays, which is a small but high-growth new segment for the company.
While packaging-machine sales are coming in above-trend today, management under CEO Fusen Chen is innovating new products, which should raise the company's baseline revenue and earnings a few years out. So a drop-off in revenue and earnings may not even come.
Meanwhile, the normally conservative management just raised the company's dividend 21% in October, which is now yielding 1.3%. Share repurchases have been ticking up, too, for the first time in a while.
All in all, Kulicke & Soffa is a value stock riding the wave of semiconductor growth and digitization. It's not a household name, but it could very well bolster your tech portfolio in tumultuous times.
