The S&P 500 is in a bear market -- down 22% from its all-time high. But the sell-off has been far worse for the tech, consumer discretionary, and communications sectors, as well as the Nasdaq Composite, which is down 31% from its all-time high.
Many individual tech stocks are down far worse from their all-time highs. The averages have been buoyed by larger companies like Apple, Alphabet, and Microsoft, which, all things considered, are down relatively little.
Investors looking for well-rounded tech stocks have come to the right place. Adobe (ADBE -0.84%), Cognex (CGNX -0.72%), and Amyris (AMRS) stand out as good buys now. Here's why.
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This is how you want a business to slow down
Daniel Foelber (Adobe): The tech sector has been one of the hardest hit by the Nasdaq bear market. Many individual names from Shopify to Netflix are down 75% or more from their all-time highs.
While some risk-tolerant investors may be interested in picking up hyper-growth names on sale, a simpler approach is to pick up shares of industry-leading companies that have the business models needed to endure a prolonged downturn -- companies like Adobe.
Adobe stock is down nearly 50% from its all-time high. The latest leg of the sell-off is due to its recently released full-year revised fiscal 2022 guidance, which calls for year-over-year revenue growth of just 11.8% and diluted earnings per share (EPS) growth of 8.1%. If Adobe hits its $17.65 billion revenue target and non-GAAP EPS guidance of $13.50, it will have achieved all-time high results for both metrics during what has been a challenging economic climate.
However, Adobe's market-beating performance over the last few years is largely due to a unique combination of recurring revenue from its subscription model, high gross margins, and strong top- and bottom-line growth. Simply put, Adobe used to have it all. And now, the growth story is gone.
But what Adobe has going for it now (that it hasn't had for years) is a reasonable valuation. Adobe is shifting from a growth story to a well-rounded investment similar to other established mega-cap tech stocks. It has a price-to-earnings (P/E) ratio of 35.4, which is deservingly below its 10-year median P/E ratio of 54.4. However, Adobe's forward P/E ratio is now just 26.9. What's more, Adobe is still putting up record results, generating a boatload of free cash flow, and has one of the highest gross profit margins in the software as a service (SaaS) industry at 88% and an operating margin of 35%.
When interest rates are rising, inflation is at a 40-year high, and consumer spending is falling, it's hard to expect companies to grow at a breakneck pace. In an environment where many growth stocks are losing money, free cash flow negative, taking on debt, and/or have weak balance sheets, Adobe is a breath of fresh air.
Adobe's guidance illustrates how you want a business to slow down in a recession. It involves the business doing OK -- not great, but still putting up incredible results, booking sizable profits, and generating positive free cash flow so it doesn't have to take on debt. Add it all up, and Adobe offers an impeccable risk/reward in the tech sector.
Cognex's stock valuation is now at multi-year lows
Lee Samaha (Cognex Corporation): This leading machine vision company has been hit harder than most by the tumultuous events of 2022. Going into the year, the expectation of Cognex's management, and many others, was that global supply chain issues would ease, leading to a gradual resumption of deliveries of critical components like semiconductors.
Unfortunately, that positive outlook hasn't been realized. Instead, ongoing lockdowns in China, a war in Ukraine, labor shortages, surging raw material inflation, and other ongoing supply chain issues have, at the very least, delayed that recovery. That's terrible news for a company like Cognex, particularly as these issues significantly affect two of its three key end markets (automotive and consumer electronics). Cognex CEO Rob Willett's warning (delivered on the first-quarter earnings call in May) that "automation projects are taking longer to deploy, and some are being delayed because of supply chain challenges and staffing shortages" is a sign of the times.
It's going to be a challenging year for Cognex. However, some valuation context is needed here. Despite the near-term disappointment, Wall Street analysts still expect $1.1 billion in revenue in 2022 (some $415 million higher than in 2019) and double-digit revenue growth in 2023. You rarely get to buy a growth stock like Cognex on such a valuation, and if you can close your eyes and ears to some potentially bad news coming up in the second quarter, the stock looks very attractive for long-term buyers.
Data by YCharts.
Time to take a real look at this synthetic biology stock
Scott Levine (Amyris): After falling 62% since the start of 2022, Amyris is one stock that is at the top of my watchlist these days. As a leader in synthetic biology, or "synbio," Amyris engineers molecules that are subsequently used as ingredients in various products, ranging from healthcare to food and beverage to cosmetics. The ingredients that Amyris has developed through its synbio process can be found in more than 20,000 products.
Now's a particularly interesting time for Amyris, because it recently reached a significant milestone: Fermentation has begun at its new plant in Barra Bonita, Brazil. Like so many businesses, Amyris has been plagued by supply chain headwinds that have hampered the company's growth. The development of the new fermentation plant in Brazil, however, is an important step in its attempt to overcome supply chain challenges and improve its resilience.
Addressing the company's feat of beginning fermentation at the plant, COO Eduardo Alvarez commented: "The plant will allow Amyris to more efficiently meet demand from its ingredient customers after several years of operating under third-party capacity supply constraints." According to management, plant capacity at Barra Bonita is already committed through 2023, illustrating how valuable an asset the facility is to the company meeting customer demand.
While the company's news is encouraging, it doesn't mean that investors should rush to click the buy button. Management foresees plenty of growth in the company's future as cosmetics companies, as well as those in other industries, embrace synbio ingredients. So waiting a little longer before picking up shares seems reasonable -- maybe until management confirms its projection that three of its new manufacturing facilities will achieve full-scale commercial production by the end of 2022.
