The NASDAQ-100 Technology Sector index has lost 17% of its value so far in 2022 as investors have sold technology stocks. This has been caused by a hawkish Federal Reserve that just hiked interest rates as well as other factors that are likely to negatively impact companies in this sector, such as rising inflation and geopolitical instability.
Some high-flying technology stocks that have historically delivered outstanding returns to investors have borne the brunt of this sell-off. Shares of Advanced Micro Devices (AMD 2.37%) and Applied Materials (AMAT 2.98%) are down 22% and 16%, respectively, so far this year. However, both stocks have shown signs of a resurgence of late, along with the broader technology sector.
Why you should buy the dips in AMD and Applied Materials
Of course, a couple of strong sessions don't mean that a tech stock rally has finally arrived. However, it may be a good idea to buy shares of AMD and Applied Materials while they are still down. That's because both stocks rallied hard following the stock market sell-off of February-March 2020.
Once the market hit bottom on March 23, 2020, shares of AMD and Applied Materials rallied furiously until the end of 2021, generating eye-popping returns for investors in the process. If you'd invested $1,000 in each on March 23, 2020, you would have $3,920 and $3,450, respectively, at the end of December 2021.
It wouldn't be surprising to see these tech stocks repeat their impressive feats in the next bull market, especially considering that the demand for their products and solutions is going to remain robust for a long time to come. That's why it would make sense for investors to accumulate shares of AMD and Applied Materials while they're down and are available for relatively cheaper valuations.
AMD, for instance, is trading at 45 times trailing earnings and 28 times forward earnings. When compared to the five-year average trailing multiple of 109 and forward earnings multiple of 57, the stock is quite cheap.
Applied Materials, on the other hand, is trading at 18 times trailing earnings and 15 times forward earnings. These multiples are in line with the company's five-year average earnings multiples, but it is worth noting that Applied Materials had a trailing price-to-earnings ratio of 24 in 2021. So, just like AMD, Applied Materials stock is also on the affordable side right now.
However, these companies may not be available at such attractive valuations in the future given the pace at which they're growing.
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Secular catalysts should help these tech stocks fly higher
AMD finished 2021 with $16.4 billion in revenue, up 68% from the prior year. The company's earnings shot up 117% to $2.79 per share last year. That terrific growth was driven by solid demand for AMD's processors, which are used in several applications ranging from personal computers to data centers to supercomputers to gaming consoles.
AMD's guidance indicates that its outstanding growth is set to continue in 2022. The company has guided for 31% revenue growth in 2022 to $21.5 billion. However, AMD could do better than that, as the company was originally anticipating its 2021 revenue to increase 37%, and its actual growth came out to be much higher.
There are a few concrete reasons why AMD could exceed its expectations once again this year. For example, the company is on track to benefit from an increase in sales of gaming consoles. Microsoft and Sony use AMD's semi-custom chips in their consoles. Sony sold 17.3 million units of the PlayStation 5 (PS5) by the end of 2021, while Microsoft's latest Xbox consoles reportedly moved 12 million units by the end of last year.
Sony's PS5 is expected to hit an installed base of 67 million units by 2024, while Microsoft's current-generation Xbox consoles could have an installed base of 44 million units by then. Throw in the fact that AMD is now powering another handheld console, and its semi-custom business seems built for solid growth in the long run.
The server processor business will be another key growth driver. That's because AMD has been consistently taking share away from rival Intel in this market. AMD reportedly had a 10.7% share of the server processor market at the end of 2021. Analysts expect its share to go as high as 25% in the server processor space.
Applied Materials, meanwhile, is benefiting from the semiconductor boom as it supplies manufacturing equipment and services that help foundries make chips. The company finished fiscal 2021 with record revenue of $23 billion, up 34% from the prior year. Applied Materials maintained its growth momentum in the first quarter of fiscal 2022, with revenue increasing 21% year-over-year to $6.27 billion and adjusted earnings jumping 36% to $1.89 per share.
Applied Materials clocked such impressive growth despite supply chain constraints, and exited the quarter with a record order backlog of $8 billion. The company expects spending on wafer fabrication equipment to increase 15% in 2022 to $100 billion. More importantly, management anticipates that Applied Materials will grow at a faster pace than the broader market, and carry a significant backlog into 2023 as well.
With annual spending on wafer fabrication equipment expected to hit as much as $120 billion by 2025 according to third-party estimates, Applied Materials is operating in a market that's built for long-term growth. This explains why analysts are expecting Applied Materials to clock 16.5% annual earnings growth for the next five years -- though the company could do better by sustaining its current pace on account of the sizable end-market opportunity it is sitting on.
Time to buy
Both AMD and Applied Materials could regain their mojo and turn out to be top growth stocks in the long run. We have already seen the capability of these stocks to bounce back big time following a market correction, which is why investors should consider using their relatively cheap valuations to buy shares and set their portfolios up for terrific gains before the next rally arrives.
