The tech sell-off of 2022 has created some solid opportunities for investors to buy shares of fast-growing companies at attractive valuations.
With the Nasdaq-100 Technology Sector index down more than 12% so far this year, it would be a good time for savvy investors to buy stocks that seem capable of delivering big returns in the long run. Microsoft (MSFT 0.37%) and Himax Technologies (HIMX 1.02%) are two such tech stocks that investors may want to consider buying as they are on track to gain from some fast-growing trends.
Let's see why putting $5,000 in these two tech stocks could turn out to be a profitable move in the long run.
Image source: Getty Images.
1. Microsoft
Shares of Microsoft have beaten the broader market handsomely, turning a $5,000 investment into more than $23,000 over the past five years.
MSFT data by YCharts
The tech giant's impressive upside has been driven by robust growth in its revenue and earnings, and its momentum is expected to continue in the future. Analysts expect Microsoft's earnings to grow at a compound annual rate of over 18% for the next five years, which would be an improvement over the growth it has clocked in the last five.
However, it wouldn't be surprising to see Microsoft clocking faster growth, as the company is expanding into fast-growing markets. For instance, the video gaming business should be a key growth driver for Microsoft once the company completes the acquisition of Activision Blizzard, which it announced in January this year. The $69 billion acquisition would bring popular gaming titles such as Warcraft, Call of Duty, Overwatch, and Candy Crush, among many others, into Microsoft's fold.
It is worth noting that Activision generated $8.8 billion in revenue last fiscal year, along with adjusted earnings of $4.08 per share. Microsoft's gaming segment reportedly generated $15.4 billion in revenue in fiscal 2021, an increase of 33% over the previous year. This terrific growth was driven by an increase in sales of the company's Xbox gaming consoles, as well as an increase in the subscriber base of its Xbox Game Pass gaming subscription service and the sale of video gaming titles.
So the Activision acquisition could give the company's gaming business a substantial boost, helping Microsoft bring in more subscribers, boost the sales of its gaming consoles, and steal market share from rivals.
Beyond gaming, the growing adoption of cloud computing should be another tailwind for Microsoft, as it is a major player in this space. A third-party estimate puts Microsoft's share of the $180 billion cloud computing market at 22% in the fourth quarter of 2021. The company has increased its share of this market over the past five years, as it controlled 16.5% of the cloud infrastructure services space at the end of 2016.
With the cloud computing market expected to clock annual revenue growth of 29% through 2027, Microsoft's solid position in this space could give its top and bottom lines a big boost. As such, it wouldn't be surprising to see Microsoft's earnings grow at a faster pace than analysts' expectations.
Assuming a 25% annual growth rate for the next five years, Microsoft's earnings could increase to $24.50 per share by fiscal 2026. The stock has a five-year average forward earnings multiple of 28, and multiplying that by its projected earnings would translate into a stock price of $686. That would be more than double Microsoft's closing stock price of $304 on March 24, making it an ideal bet for investors looking for a growth stock to boost their portfolios.
2. Himax Technologies
Shares of Himax Technologies have taken off over the past couple of years, driven by the terrific growth in the company's revenue and earnings. A $5,000 investment in Himax stock a couple of years ago would be worth nearly $21,000 now, even after accounting for the massive pullback in the share price this year.
HIMX data by YCharts
The fabless semiconductor company has benefited big time from the robust demand for its display drivers, touch panel controllers, and image sensors, which are used in a variety of applications ranging from smartphones to tablets to televisions to vehicles. The company exited 2021 with revenue of $1.55 billion, an increase of 74% over the previous year, while adjusted earnings per share shot up 778% to $2.65.
Himax stock is trading at a dirt-cheap valuation despite such impressive growth. The company trades at 4.8 times trailing earnings and just 1.35 times sales. These multiples indicate that the stock is trading at a massive discount to the S&P 500's earnings multiple of 24.5 and sales multiple of 3. Buying Himax stock at this valuation is a no-brainer, as its outstanding growth momentum is here to stay given the markets the company serves.
For instance, the automotive display market is expected to add $3.7 billion in revenue between 2022 and 2025 as per third-party estimates, driven by increasing connectivity, the adoption of digital cockpit systems, and digital instrument clusters. Himax is taking advantage of this opportunity already: The company shipped over 1 million touch and display chips to automotive customers in the third quarter of 2021.
Himax expects to double its automotive revenue this year following last year's increase of 110%, with the segment expected to become the largest contributor to the company's revenue. Similarly, the jump in demand for televisions supporting 8K and 4K resolutions is going to be another growth driver for Himax. Shipments of 8K televisions are expected to jump from 11 million units last year to 31 million in 2025, while the 4K television market is expected to clock annual growth of 18% through 2024.
The increase in shipments of higher resolution televisions bodes well for Himax's timing controller business, which saw revenue more than double last year thanks to the growing need "for high frame rate and high-resolution displays." Meanwhile, Himax is focused on expanding its presence in the OLED (organic light-emitting diode) display market as well, with the company pointing out that it will begin mass production of these drivers in the second quarter of 2022.
The entry into the OLED display market is going to unlock a terrific opportunity for Himax, as the global OLED market is set to grow at nearly 15% a year through 2026.
All of this indicates that Himax is sitting on several catalysts that could help it grow at an eye-popping pace in the long run. Throw in the company's cheap valuation, and it is easy to see why this is one tech stock that investors should consider putting their money on.
