After nearly a decade of leading the market higher, tech stocks have hit a wall in 2022 in the face of rising inflation and rising interest rates. The tech-heavy Nasdaq Composite is down nearly 26% year to date, and the Technology Select Sector SPDR ETF (NYSEMKT: XLK) is down 24% over the same time frame.
But investing is a long-term game, and for long-term investors, this sell-off creates the opportunity to buy some of the world's most innovative companies at a steep discount to where they were just a few months ago. Many of these companies are crucial to the global economy, have wide moats, and create irreplaceable products, so it seems likely that these stocks will help investors grow their portfolios over the long run.
Image source: Getty Images.
1. Lam Research
Many stocks have sold off in the current market environment because they traded at very expensive valuations that were less palatable with rising interest rates or because they had no profits whatsoever. That is not the case with semiconductor fabrication equipment maker Lam Research (LRCX 2.23%). Shares of Lam are also down because of supply chain constraints in the semiconductor industry. The wafer fabrication equipment market is expected to see robust growth over the next few years, with forecasts calling for it to nearly double from nearly $90 billion last year to $175 billion in 2027.
Semiconductors are everywhere, and, simply put, the world is going to need more of them going forward. Beyond computers and smartphones, more semiconductors are going to be needed for autonomous vehicles, artificial intelligence, and Internet-of-Things-connected devices.
Lam has a large installed base of equipment, which entrenches it with customers who are unlikely to move away from Lam once investing in this equipment. This also creates a razor-and-blade business model, as Lam also services this equipment.
Despite being one of the world's leading semiconductor equipment companies, shares of Lam trade at just 12 times earnings and 10 times forward earnings. For comparison, McDonald's (NYSE: MCD) and Domino's Pizza (NYSE: DPZ) trade at price-to-earnings multiples of 26 and 30, respectively. These are great companies, but I feel better paying 12 times earnings for a state-of-the-art semiconductor equipment company than more than twice that for a pizza or fast-food company.
Lastly, Lam pays out a dividend that yields 1.5%. Lam is also returning value to shareholders via share buybacks. In May, Lam's board of directors authorized a $5 billion share buyback plan. With a current market cap of just under $55 billion amid the ongoing sell-off across semiconductor stocks, this is a sizable repurchase program. Lam Research looks like a solid addition to a long-term portfolio because it is a market leader in a critical industry available for a compelling valuation.
2. Intuitive Surgical
Speaking of companies with high-tech products and razor and blade business models, how about robotic surgery equipment pioneer Intuitive Surgical (ISRG 2.21%)? The maker of the Da Vinci Surgical System is increasing the installed base of its machines over time, and procedure growth is also increasing.
The growing installed base is the razor here, and the higher-margin consumables and instruments that are replaced for each procedure are the "blades" that lead to recurring revenue growth. Procedures grew at a 14% compound annual growth rate (CAGR) between 2019 and 2021, and the company forecasts growth of 11 to 15% this year. Intuitive has grown revenue at a 13% CAGR in this same time frame, and 75% of this revenue is now recurring.
The machines come with a significant price tag of up to $2.5 million and require extensive training to use, so once Intuitive Surgical installs them, hospitals are unlikely to switch to a competitor's product just to save a few dollars.
Despite this strong business model, wide moat, and market leadership in an exciting field, shares of Intuitive are down 42% year to date, largely due to the same reasons that have plagued tech stocks in general. While Intuitive is not as cheap as the other names on this list, it has never been cheap on a valuation basis. That said, the current price near 52-week lows seems like a good opportunity to add this pioneer with a wide moat and attractive business model to your portfolio.
3. Zebra Technologies
Let's take a look at Zebra Technologies (ZBRA 1.81%). If you don't know Zebra, you will probably recognize some of the products that the company first introduced to the world, such as the laser barcode scanner, the laser scannable 2D barcode, and the RFID handheld. While this may not sound like the most exciting business, it is an increasingly important one as the world grows more connected.
Today, Zebra enhances these offerings and serves as an even more integral and important part of its customers' operations by supporting these hardware products with its growing software business. Like Lam and Intuitive Surgical, this gives Zebra a sticky business model, and customers are unlikely to walk away from it.
Zebra serves a wide array of end markets, including retail and e-commerce, healthcare, hospitality, transportation and logistics, and more. Zebra is the industry leader in indoor location services -- Gartner Magic Quadrant ranked Zebra as a leader for the third year in a row.
Zebra is also buying back a lot of shares, with over $305 million in share repurchases in the first quarter of 2022. Like Lam Research, Zebra stock is trading at a modest valuation. Shares trade at just 15 times forward earnings and are currently hovering just above their 52-week low after a 52% fall from their 52-week high, making the present time look like a good entry point into this leader in a growing market.
