Because growing investments compound, the best time to start investing is always right now. But it's an especially good time to get started putting some money to work after a steep market pullback like has occurred during the first half of 2022. The S&P 500 and Nasdaq Composite indexes are down a respective 18% and 26% so far this year. There are great deals on quality stocks right now as a result.
The emergent leader in the AI movement
Nicholas Rossolillo (Nvidia): Top video game hardware designer Nvidia attracted lots of investor attention in recent years after the stock's value skyrocketed early in the pandemic. Even after falling 56% from all-time highs, shares are still up nearly 300% over the last trailing-three-year stretch. But given Nvidia's leadership in enabling artificial intelligence (AI), now looks like a fantastic buying opportunity if you plan on sitting on the stock for the next decade.
Nvidia has a long history of providing GPUs (graphics processing units) for high-end video game graphics. Turns out these GPUs are also fantastic "computing accelerators" -- ideal semiconductors for ripping through massive amounts of information that data-hungry AI applications require. After investing heavily for years to adapt its video game devices for this purpose, Nvidia is now making serious hay providing GPUs for data centers, robotics (including self-driving cars), and industrial imaging equipment.
Besides GPUs, Nvidia is building on its lead as a platform for AI by launching new chip types. It also has a small but fast-growing software division that is available on a subscription basis, which makes Nvidia's a unique business model among its semiconductor peers. Put simply, Nvidia's soaring valuation (which puts it among the largest companies on the planet) is justified as it helps organizations across all industries put AI to work in their operations.
One thing to bear in mind, though: Nvidia is no cheap stock. Even after its big tumble this year, shares currently trade for 51 times trailing-12-month free cash flow. That premium price tag assumes Nvidia will remain a fast-growing business for years. Thus you should only buy if you plan to park some cash in this stock for the indefinite future. But if that's your plan, this is a fantastic stock to start building a portfolio around as Nvidia leads the charge into a new era of high-performance computing applications.
A monopolistic growth company with a rising dividend: What else could you ask for?
Billy Duberstein (ASML Holding): With even the best stocks in the market down 20%, 30%, or more this year, it's hard to know exactly what a "safe" stock is. Still, semiconductor lithography equipment maker ASML has two important things going for it in the long term.
First, ASML has a monopoly on the key technology of extreme ultraviolet lithography (EUV). EUV technology is necessary to continuing Moore's Law, whereby chip companies fit more transistors onto a piece of silicon with every passing year. EUV technology was developed over 20 years in close collaboration with industry partners, and it wasn't a certainty it would work. In other words, this technology is really, really hard to replicate, so ASML's dominance of the lithography market looks pretty solid for the next decade.
The most advanced logic chips have all needed EUV ever since the industry reached the 7 nm node a few years ago, and pretty soon all DRAM memory manufacturers are going to be using EUV on their most advanced memory nodes as well. So no matter which chip designer wins market share, they will all be made with ASML's machines in the future. ASML is even seeing huge demand for its less advanced deep ultraviolet technology (DUV) for lagging-edge chips in autos, industrial applications, and the Internet of Things, as those applications are also taking off.
Meanwhile, the semiconductor industry is set for long-term growth above global gross domestic product (GDP). Although traditionally a highly cyclical sector, the long-term growth trajectory for semis is projected to be higher than GDP over this decade. Research company McKinsey sees the semiconductor sector growing at a 7% average annualized rate for the next nine years, reaching $1 trillion by 2030, up from about $590 billion in 2021. However, given that EUV has just started to be implemented over the past few years, ASML should grow at an even higher pace. Many have posited that capital intensity associated with semiconductor production should continue to go up, and ASML's management has put forth its own 11% annualized growth projection for the entire 2020s.
Meanwhile, the recent stock market rout has cut ASML's price in half, making the stock look awfully cheap when looking out a few years. At last year's analyst day, ASML projected somewhere between $8 billion and $11 billion in net income by 2025. Assuming $10 billion in earnings, the stock only trades at 18 times those projections today. However, since that presentation last year, management has pointed to better-than-expected long-term demand, and is trying to increase its capacity for 2025, signaling those initial projections could be conservative.
Finally, ASML is also returning cash to shareholders, with ample share repurchases and a dividend that yields about 1.5% today, but should grow double-digits each and every year. For beginning investors, ASML's monopoly in a growth industry combined with its rising dividend makes it a great choice to anchor your portfolio today.
Invest in what you know and understand, such as Netflix
Anders Bylund (Netflix): Master investor Peter Lynch famously suggests that if you're new to the stock market, you should invest in what you know. Likewise, investing legend Warren Buffett has said he isn't interested in companies he doesn't understand. These wealth-building wizards agree that you should put your money into opportunities that make sense.
On that note, I think you should consider one of the simplest and most successful businesses on the planet. Netflix makes high-quality shows and movies for a wide variety of tastes and audiences, and charges a modest subscription fee for that content. This was the first service in a video-streaming industry that now bustles with hopeful contenders, but Netflix still owns that throne on a global level and is likely to remain there for years to come.
There are wrinkles to the Netflix story, of course, but that's the main gist of it. The company is exploring different subscription plan ideas, adding video games to the product mix, and leaning into international productions such as the South Korean phenomenon Squid Game and the Spanish crime drama Money Heist, opening new doors to additional business growth in the long run. But really, all Netflix is doing here is applying the lessons learned from its long and remarkable video-streaming history to some closely related target markets.
Moreover, the stock is on sale right now. Netflix critics are overreacting to a temporary slowdown in subscriber growth, ignoring the fact that top-line sales and bottom-line profits are growing as fast as ever:
So the stock is trading at prices last seen in 2017, but revenue has quadrupled and earnings multiplied more than tenfold over the same period. And that massive imbalance between fantastic results and bargain-bin stock prices is attached to a crystal-clear business plan and a household-name brand. What's not to love?