Federal Reserve chair Jerome Powell sent the stock market packing on Friday, Aug. 26, following his comments that indicate the central bank may continue to increase interest rates in a bid to keep inflation in check.
The hawkish comments from the Fed chair caused the Dow Jones Industrial Average to tumble over a thousand points, while the S&P 500 shed 3.4% of its value. The Nasdaq Composite also slid 3.9% on Friday. Powell's comments delivered a blow to the stock market rally that has been in effect since the beginning of July. Tech stocks have been hit particularly hard by the rising interest rates as the 23% drop in the Nasdaq Composite indicates.
Richly valued tech stocks tend to underperform in a high interest rate environment as investors worry that high borrowing costs could stunt earnings growth. But savvy investors should note technology stocks have outperformed the broad market by a massive margin in recent years.
Data by YCharts.
That's not surprising, as companies in this sector tend to develop disruptive products that shape the future. This is the reason why investors looking to buy potential long-term winners may want to take advantage of the drop and buy solid tech stocks right now. Here are a few names to consider.
1. Tesla
Tesla (TSLA +3.01%) stock is trading at 100 times trailing earnings. While that's not remotely cheap when compared to the Nasdaq-100's multiple of 27, it is worth noting that Tesla is trading at a significant discount to its average 2021 price-to-earnings ratio of more than 600. The stock's 21% decline in 2022, along with the impressive growth in its earnings, are the reasons why it is significantly cheaper than last year.
Data by YCharts.
And that presents an opportunity investors may not want to miss, because analysts expect Tesla's bottom line to clock an annual growth rate of 45% for the next five years. The company's adjusted earnings shot up 57% year over year in the second quarter to $2.27 per share as revenue increased 42% to $16.9 billion.
Growing demand for electric vehicles, as well as the company's focus on enhancing its production capacity and deliveries, should continue to fuel Tesla's growth going forward. The company reported annual vehicle production capacity of close to two million vehicles in the second quarter, doubling from the same period last year.
The company aims to increase its annual vehicle deliveries by an average of 50% "over a multi-year horizon" and aspires to hit 20 million annual vehicle deliveries in 2030. That's an ambitious number, but the 24% annual growth expected in the EV market through the end of the decade should help Tesla get closer to its target. Investors should consider taking advantage of any pullbacks in Tesla stock to go long given its immense long-term potential.
2. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (TSM +1.97%), popularly known as TSMC, is a steal right now as it trades for just 16 times earnings, a discount to the broader market's multiple. Buying TSMC at these levels looks like a no-brainer given its terrific growth.
NYSE: TSM
Key Data Points
The company supplies chips to the world's leading companies such as Apple, Qualcomm, Nvidia, Sony, Broadcom, Intel, and Advanced Micro Devices, among others. Some of its customers are struggling because of weak demand, but others are thriving. AMD, for instance, delivered an impressive report last quarter along with healthy guidance. Qualcomm was also in fine form thanks to its market share gains at premium smartphone companies and the growth in emerging areas such as automotive chips.
Revenue jumped 37% year over year in the second quarter to $18.2 billion. The company also reported an 8.3 percentage point increase in its net profit margin, which sent earnings soaring 67% to $1.55 per share. What's more, TSMC's solid outlook suggests the concerns of a slowdown in semiconductor demand may be unwarranted.
Management's guidance of $20.2 billion in revenue (at the midpoint) this quarter points to a 36% year-over-year jump. Operating margin is also forecast to increase 6.8 percentage points to 48% at the midpoint. For the full year, TSMC is anticipating revenue to increase in the mid-30% range.
Fueling that is solid demand from the high-performance computing, Internet of Things, and automotive segments. These areas have helped TSMC offset weakness in smartphones and personal computers. Even better, TSMC's long-term outlook suggests its diversification will help it grow at a nice clip in the long run.
The company expects to clock 15% to 20% annual revenue growth over the next several years. That's not surprising given global semiconductor industry revenue is expected to increase over 60% this decade to $1 trillion. That's also probably the reason why analysts are expecting 23% annual earnings growth from TSMC over the next five years.
All this makes TSMC a top semiconductor stock to buy right now following its 30% decline in 2022.
