The U.S. equity market has been highly volatile in the past two months. While stocks from the majority of the sectors have been adversely affected, the technology sector has borne the brunt of it. Concerns about rising inflation and anticipated interest rate hikes have been only multiplied by the escalating geopolitical tensions owing to the Russia-Ukraine crisis. Subsequently, the Nasdaq Composite index has lost almost 5.5% of its value in the past month.
However, such periods of market corrections can also offer attractive entry points for retail investors in fundamentally strong stocks that were previously trading at stretched valuations. The Nasdaq-100 index, which is made of the 100 largest non-financial companies listed on the Nasdaq Stock Market, can prove to be a good starting point to find such stocks.
Here's why Adobe (ADBE 0.40%) and Broadcom (AVGO 1.64%) are two Nasdaq-100 stocks investors should consider buying right now.
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1. Adobe
Shares of Adobe are down 22% so far this year (as of March 16) as the whole technology sector has been grappling with rising inflation, cost pressures, supply chain constraints, and now escalating geopolitical tensions. Known mostly as the creator of the portable document format (PDF) file, the company has now established itself as a prominent software-as-a-service player. The company's business is organized into three segments: digital media, digital experience, and publishing and advertising.
Adobe Creative Cloud is a cloud-based subscription suite of services and a part of the digital media business. It comprises over 20 media-related software products such as Adobe Photoshop, Adobe Lightroom, Adobe Illustrator, Adobe Fresco, Adobe InDesign, and Substance 3D -- many of which are considered industry standards for creative professionals. The steep learning curve involved in mastering these products coupled with multiple features available in these products has ensured a sticky customer base for Creative Cloud.
Creative Cloud accounted for over 60% of the company's total revenue in fiscal 2021. The company has projected the target addressable market for Creative Cloud to be $63 billion by 2024.
Adobe Document Cloud, also a part of the Digital Media business, includes several products that allow users (enterprises, teams, and individuals) to create, manipulate, sign, and track Adobe PDF files across desktops and mobile devices. Document Cloud is expected to target an addressable market worth $32 billion by 2024.
Adobe Experience Cloud accounted for 24% of the company's total fiscal 2021 revenue. It encompasses a range of analytics, marketing, and IT solutions that enable businesses to make optimal data-driven decisions. With a projected total addressable market of $110 billion by 2024, this business has the potential to be a major growth driver for the company in the coming years.
Adobe has been consistently reporting robust financial performance for the past few years. The company's revenue grew annually at a compound average growth rate of 21.3% from $7.3 billion in 2017 to $15.8 billion in 2021. Adobe's net income margin has also expanded from 23.2% to 30.6% in the same time frame. The company has a robust balance sheet with cash of $5.8 billion and total debt of $4.7 billion.
ADBE PE Ratio (Forward) data by YCharts
Adobe is currently trading at 32 times forward earnings, which is quite reasonable compared to its valuation levels in the past year. Despite its strong and consistent revenue and margin performance in the past few years, the company is also not trading at a significant premium to most of its key competitors. Hence, the company appears capable of living up to investors' expectations in the long run.
2. Broadcom
Broadcom's share price is down by 10% so far this year (as of March 16), despite the company posting stellar earnings results for the first quarter of fiscal 2022 (ending Jan. 30). Revenue was up 16% year over year to $7.7 billion, while net income soared by 79.4% year over year to $2.5 billion. The company's semiconductor solutions segment reported a 76% year-over-year rise in revenue to $5.9 billion and accounted for 76.6% of the company's total revenue.
The revenue growth was driven mainly by a recovery in enterprise IT spending, hyperscalers (companies in the business of offering public cloud, networking, and internet services to organizations at scale) upgrading their data centers, and telecom operators investing in the 5G upgrade cycle. The company is guiding for revenue of $7.9 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of around 62.5% of projected revenue in the second quarter.
Broadcom is witnessing robust long-term tailwinds across most of its business segments. The company's networking solutions (Jericho and Trident switches) continue to be in high demand as hyperscalers and telecommunication players are increasingly upgrading to 200-gigabyte and 400-gigabyte Ethernet as a backbone network. Broadcom is a leading supplier of Wi-Fi 6 and 6E chips for routers, mobile devices, and enterprise access points.
The company is also investing heavily in the next upgrade of a wireless networking standard, Wi-Fi 7. Broadcom's wireless solutions business (radiofrequency and wireless chips) will continue to benefit from the 5G upgrade cycle as well as increasing silicon content in these next-generation devices. Finally, enterprises are also increasingly upgrading their computer servers, which is driving demand for Broadcom's next-generation storage connectivity solutions.
Broadcom paid $1.8 billion in cash dividends and repurchased $2.7 billion worth of common stock in the first quarter. The company has an impressive track record of returning value to shareholders.
Against the backdrop of multiple growth drivers and solid financials, coupled with the ongoing semiconductor shortages, analysts expect Broadcom's revenues to grow by 27.2% year-over-year in the second quarter and by 14.7% annually in the next five years.
