This year has been a reminder that the stock market doesn't move up in a straight line -- even if 2021 would have led you to believe otherwise. Through the first six months of 2022, the widely followed S&P 500 produced its worst return in 52 years.
Things have been even tougher for the technology-driven Nasdaq Composite and Nasdaq 100, which have lost around a third of their value since closing at their all-time highs. The Nasdaq 100 -- an index comprised of the 100 largest nonfinancial companies listed on the Nasdaq exchange -- is packed with the companies that powered the broader market higher following the coronavirus crash in March 2020.
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The silver lining is that when trouble arises, there's often opportunity for long-term investors to pounce. Every bear market decline throughout history has represented an opportunity to scoop up high-quality companies at a perceived discount. With the market well off its high, the following three Nasdaq 100 stocks stand out as companies that can be bought hand over fist by opportunistic investors in September.
Intuitive Surgical
The first Nasdaq 100 stock that patient investors can confidently buy as we steam forward into September is robotic-assisted surgical systems developer Intuitive Surgical (ISRG -0.55%).
Generally speaking, healthcare stocks are highly defensive. No matter how poorly the stock market or economy perform, people don't get to choose when they get sick or what ailment(s) they develop. This creates steady demand for prescription drugs, medical devices, and healthcare services.
But in Intuitive Surgical's case, the company has seen optional procedures postponed due to the pandemic and economic uncertainty (which includes historically high inflation). Pushing these procedures further down the road has slowed the company's growth in the near term, which in turn has weighed down its share price and provided the opportunity for long-term investors to pounce.
In the highly competitive healthcare space, having a moat is crucial. Intuitive Surgical pretty much had a multidecade head start over its peers with installing and monetizing robotic-assisted surgical systems. As of the end of June, it had more than 7,100 of its da Vinci surgical systems installed worldwide. No other surgical system developer is even close to this figure.
Also, da Vinci systems are pricey ($500,000 to $2.5 million each), and there's quite a bit of training needed before surgeons can use them. These tangible and intangible costs make it highly unlikely that existing clients will switch to competing systems anytime soon, if ever.
But the real lure of Intuitive Surgical is its razor-and-blades business model. The idea is to hook customers with the generally lower-margin razor, and keep them coming back for higher-margin blades over the long run.
Intuitive Surgical's da Vinci system (i.e., the "razor") is intricate to build, and therefore yields only mediocre margins when sold. By comparison, the company generates its juiciest margins from selling instruments with each procedure and from servicing its systems (i.e., the "blades"). Over time, instruments and servicing have grown into the lion's share of total sales. In other words, Intuitive's profit growth can and should outpace its revenue growth throughout the decade.
Skyworks Solutions
A second Nasdaq 100 stock investors can buy hand over fist in September is analog semiconductor solutions company Skyworks Solutions (SWKS 1.83%).
To echo a theme you'll observe among all three stocks listed here, Skyworks' share price has been hit by the growing likelihood of a recession. Semiconductor stocks tend be highly cyclical, which means they ebb and flow with the U.S. economy. After two consecutive quarters of declines in gross domestic product, there's a real expectation on Wall Street that chipmakers and semiconductor solution providers will see their orders slow.
Although this is a fair assessment of what could occur over the next couple of quarters, it overlooks key longer-term catalysts for the already value-priced Skyworks Solutions.
For example, it provides a number of accessories found in next-generation smartphones. Not only are aggregate smartphone sales increasing worldwide on a fairly steady basis, but the ramped-up rollout of 5G wireless infrastructure also provides an impetus for businesses and consumers to upgrade their wireless devices. We could realistically see 5G-capable smartphone sales grow throughout the decade, which would be a boon for Skyworks.
To build on this point, Skyworks Solutions generates a significant portion of its sales from Apple. In fiscal 2021, Apple accounted for 59% of the company's total sales. With the tech kingpin on the leading edge of the 5G revolution and expected to unveil the iPhone 14 this week, Skyworks can expect a continued boost from the largest publicly traded company.
Furthermore, Skyworks Solutions should enjoy incremental annual sales growth from its ancillary channels. For example, next-gen vehicles are more reliant than ever on technology. Likewise, businesses are pushing data into the cloud at a quicker pace since the pandemic began. These trends should lead to higher sales for Skyworks' automotive and data-center products.
Valued at less than 9 times Wall Street's forward-year earnings forecast, the stock has all the hallmarks of a screaming buy.
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Palo Alto Networks
The third and final Nasdaq 100 stock to buy hand over fist in September is cybersecurity stock Palo Alto Networks (PANW 0.11%).
Like most growth stocks, Palo Alto has come under pressure because of its premium relative to its earnings and sales. The expectation on Wall Street is that businesses will be paring back spending in anticipation of near-term economic weakness, which could hurt companies like Palo Alto Networks. But this shortsighted thinking overlooks a number of tailwinds firmly in the company's sails.
On a macro level, we've witnessed cybersecurity evolve from an optional service to basic necessity for businesses of all sizes. Hackers and robots don't take time off from trying to steal sensitive information just because Wall Street hit a rough patch. This leads to steady demand and predictable operating cash flow for companies like Palo Alto.
What makes Palo Alto Networks such an intriguing investment is the company's aggressive shift to cloud-based cybersecurity solutions that are powered by artificial intelligence (AI) and machine learning. It's no secret that AI-driven security solutions are typically superior to on-premises solutions when it comes to recognizing and responding to potential threats. Businesses are usually willing to pay a premium for subscription software as a service.
This ongoing transformation -- four years in and counting -- to next-generation cybersecurity solutions increased the company's subscription and support revenue to 75.2% of net sales in fiscal 2022 (ended July 31). This is a higher-margin operating segment that'll avoid the revenue lumpiness often associated with the product-replacement cycle of physical firewall products.
What's more, Palo Alto continues to dazzle with its bolt-on acquisition strategy. Though the company is doing just fine with organic growth, it has leaned on smaller acquisitions to expand its next-generation service ecosystem, boost cross-selling opportunities, and broaden its potential pool of customers.
Palo Alto Networks might not be as fundamentally inexpensive as a company like Skyworks Solutions, but its premium is well deserved given its execution.
