September has historically been one of the most difficult months in markets, and the market is already down significantly on the year. Moreover, the tech-heavy Nasdaq has been hit even harder, as higher interest rates and slowing post-pandemic growth have led to a double-whammy of bad news for tech stocks broadly.
But with so many stocks down big, there's bound to be some great deals, especially given the innovation happening around artificial intelligence, 5G, electric vehicles, robotics, and other game-changing applications.
Here are three stocks experiencing short-term pain but that should thrive over the long-term, making them bargain buys at today's marked-down prices.
Sure, Amazon (AMZN -2.00%) may have overbuilt its e-commerce infrastructure during the hypergrowth of the pandemic, which has crushed margins as growth has slowed this year. But that's just a short-term concern.
New CEO Andy Jassy has already made major adjustments, including canceling some buildouts and even subleasing certain warehouses and distribution spaces. Moreover, Amazon is eventually going to grow enough to utilize its market-leading logistics footprint and improve on its margin.
Yet taking a broader view, Amazon's first-party retail business, in which it buys and owns its own inventory, probably gets too much publicity as the highest-revenue segment of the company. But it's also the lowest-margin, and it may not even be Amazon's most valuable segment.
Amazon's smaller businesses are much higher-margin and also growing faster. First, Amazon Web Services (AWS) grew a solid 33% last quarter and garnered a 31% operating margin over the prior 12 months. AWS has first-mover advantage in cloud computing infrastructure, and this is a utility-like business with a long growth runway. Even in a recession, it's possible companies may lean even more heavily on cloud computing to avoid the up-front costs of building their own data centers. In fact, given its high margin and growth profile, AWS may be worth as much as Amazon's entire market cap today.
Moreover, Amazon's up-and-coming digital advertising business is growing nicely, and given the margins seen at other large-scale digital advertising companies, it's likely high-margin as well. And while overall retail is struggling, Amazon's third-party e-commerce sales, which are higher-margin than first-party sales, held up much better, up 9% last quarter, whereas the first-party e-commerce business was down 4%.
Then there are new innovations at Amazon, which include new "Just Walk Out" physical retail technology, along with a new push in the fields of robotics. So while the near-term picture in its e-commerce business has suffered this year, the long-term growth picture for Amazon is still very much intact.
While short-term concerns have caused a 20% sell-off this year, even after another underwhelming performance in 2021, Amazon's stock may be due for another big run when the economy recovers.
While this year has been bad for e-commerce stocks like Amazon, the semiconductor sector has been enduring an even worse drawdown. After consumers loaded up on PCs, phones, tablets, and TVs during the pandemic, inflation and rising interest rates are basically bringing those purchases to a halt, leading to a glut of consumer-related chips.
Applied Materials (AMAT -2.74%) is the largest semiconductor equipment manufacturing company in the world, so its stock has also seen a big 38% sell-off this year, in spite of solid operating performance to date. Now trading at just 12.8 times trailing earnings, it appears as though the worst may be priced in.
Keep in mind that Applied soundly beat revenue and earnings estimates last quarter, and it also maintained that demand for its cutting-edge machines is still well ahead of its ability to supply. So what explains the disconnect?
Investors should care to separate the semiconductor equipment suppliers from the chip designers in the consumer space. While the memory segment of the market is very weak, as are chips for consumer-related devices, there are other parts of the market that are still quite strong and even undersupplied. This includes automotive and industrial chips, and data center semiconductors also appear to be holding up well.
Meanwhile, there is tremendous competition going on among Intel, Samsung, and Taiwan Semiconductor Manufacturing to grab the lead in leading-edge chip manufacturing, and leading-edge manufacturing is only becoming more difficult and capital-intensive. Therefore, that should benefit Applied Materials, which got two-thirds of its revenue from foundry and logic customers last quarter, versus just one-third from memory.
If Applied Materials makes it through this chip slowdown with better-than-feared or no revenue and earnings declines, the stock could rerate much higher coming out of this downturn. Given the above-GDP growth projections for semiconductors over the long term, Applied Materials looks like a tremendous long-term bargain today.
Google parent Alphabet (GOOG -2.31%) (GOOGL -2.33%) has been very cheap by most measures for a while now, and especially in 2022. Good thing the company is stepping up its share repurchases this year, with a new $70 billion authorization.
At its current market capitalization, that's about a 5% total shareholder return. That's fairly amazing for this growth stock with a huge competitive advantage in online search. Even in a quarter marked by a big pullback in digital ad spending, Google Search still grew 13.5% last quarter, and Alphabet's overall ad revenue climbed 10.1%.
Coming after a very high-growth year last year and given all the macroeconomic headwinds, that's not a bad result at all. In addition, Alphabet's price-to-earnings ratio of 20.5 is cheaper than it's been in years, and it's actually lower than the multiple of the S&P 500 overall, at 21.8. That doesn't seem right, since Google is definitely an above-average business, and Alphabet is still generating losses from both its cloud computing and moonshot "other bets" segments. Those losses are depressing earnings by roughly 10%, but those segments still are likely to have significant positive value. That means Alphabet is even cheaper than it appears.
All in all, Google Search looks resilient, the company's cloud computing segment is showing strong growth, and management is finally turning up the share buybacks. It's another bargain tech stock to buy in September.