The U.S. equity market has become highly volatile in the past few weeks, as investors have been increasingly worried about the rising interest rates and skyrocketing crude oil prices amid escalating geopolitical tensions due to the ongoing Russia-Ukraine war. The CBOE Volatility Index (VIX), a 30-day forward estimate of market volatility, is 30.74 (as of March 2). Values above 30 are generally associated with increased market uncertainty and rising investor fears.
Many growth stocks, once considered safe havens, have taken a severe beating in this uncertain environment. While the correction has been justified for several speculative plays, many high-quality gems have also gotten unduly battered. The pullbacks in these stocks are mostly temporary, presenting an attractive buying opportunity for long-term investors.
For investors worried about a steep market correction, Advanced Micro Devices (AMD 2.37%) and Shopify (SHOP 1.11%) can prove to be smart buys in the long run. Here's why.
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1. Advanced Micro Devices
AMD has successfully positioned itself as one of the "must-have" stocks in any serious long-term tech investor's portfolio, thanks to its now-dominant position in the semiconductor industry (CPUs, and now it's making its presence felt in GPUs). According to Mercury Research, the company recorded a 25.6% share of the x86 CPU market in the fourth quarter (ending Dec. 31, 2021), its highest ever despite ongoing semiconductor supply shortages.
AMD has been making rapid gains in the high-margin server CPU market, thanks to the robust adoption of EPYC server processors across the cloud, high-performance computing (HPC), and enterprise customers in the data center segment. The company accounted for 10.7% of the global server CPU market at the end of the fourth quarter, a year-over-year improvement of 3.6 percentage points. Intel's server CPU share dropped by the same percentage points to 89.3% in the same time frame.
The pace of AMD's market share growth may accelerate even more after the scheduled launch of its fourth-generation EPYC processors (Genoa) in late 2022. The recently completed $35 billion acquisition of Xilinx is expected to strengthen the combined company's position in HPC and add new opportunities in industries such as data center, automotive, and communications.
On the client side, AMD's Ryzen 5000 processors have been witnessing solid demand from the gaming community, especially in higher-end desktops and notebooks. The company is also well positioned to benefit from the ongoing gaming console upgrade cycle, since it is a major supplier of semi-custom chips for Microsoft's Xbox and Sony's PlayStation consoles.
AMD's revenues have grown annually at a compounded average growth rate (CAGR) of over 36%, from $6.5 billion in 2018 to $16.4 billion in 2021. Operating margins have also expanded from 6.97% to 22.2% in the same time frame. The company is profitable, free cash flow positive, and had $3.6 billion cash on its balance sheet at the end of fiscal 2021.
Given the many secular tailwinds driving demand for AMD's products and its solid financial position, the stock seems well poised for a robust growth trajectory in the coming years.
2. Shopify
Shopify has suffered a significant share price decline in the recent tech sell-off. The company's fourth-quarter results (ending Dec. 31, 2021), although not horrible, have certainly failed to impress investors. While the company reported an adjusted net income of $2.91 billion in fiscal 2021, it was mostly attributed to an unrealized gain on equity investments. This also seems to have hit the investors in the wrong way.
Despite these shortcomings, this e-commerce company, which offers tools to mom-and-pop retailers to set up their online presence, is on the right side of the ongoing global digitization trend. The company accounted for a 10.3% share of the U.S. retail e-commerce sales (based on gross merchandise value or GMV) as of October 2021, second only to Amazon's 41% share and ahead of Walmart's 6.6% share.
However, Shopify is more of a technology company than an e-commerce player. The company earns its revenues by selling customized solutions and monthly subscriptions to merchants. Shopify's growth is aligned with those of the merchants using its tools. It is difficult for merchants to shift to alternate platforms, resulting in a sticky customer base for Shopify.
Shopify is well poised to benefit from the flywheel effect in coming years, since an increasing number of merchants on its platform translates into higher GMV, which again, attracts even more merchants. The company has also been successful in cross-selling its newer products to existing customers. In the fourth quarter, Shopify payments were used to process 51% of the total GMV, a jump from 46% GMV penetration in the fourth quarter of the previous year. Cash advances and loans to merchants (Shopify Capital) were also up 43% year over year to $323.7 million in the fourth quarter.
In fiscal 2021, Shopify's revenues soared by 57% year over year to $4.6 billion. The company is guiding for a lower fiscal 2022 revenue growth guidance as compared to the growth rate seen in the previous year (although it has not given actual numbers). This is attributed to headwinds such as the absence of COVID-triggered e-commerce acceleration as seen in the first half of fiscal 2021, changing revenue-sharing terms with third-party developers, and the time it will take to see the impact of new marketing initiatives.
But none of these challenges negatively affect the long-term growth story of Shopify. Against this backdrop, I believe this may be an opportune time to pick this fundamentally strong stock as a long-term investment.
