The tech-heavy Nasdaq has been crushed this year. The Nasdaq Composite is down 27% and could be a fertile breeding ground for quality high-growth stocks selling at mouthwatering prices. Though there is lingering uncertainty about the global macroeconomic environment, you might regret not buying the dip on these three Nasdaq names.
1. Warren Buffett is Apple's biggest cheerleader
Apple (AAPL 0.49%) is the largest holding in Warren Buffett's company, Berkshire Hathaway. The company first started accumulating shares in 2016. Then in a show of confidence in the company, Buffett bought more shares in the first two quarters of this year.
After the old-fashioned investor finally traded his flip phone for an iPhone in 2020, he regarded the product as a "sticky" one. He was referring to the wildly loyal iPhone enthusiasts who repeatedly return to the product time and time again. The iPhone is one of the most popular smartphone brands in the world, controlling about 50% of the U.S. market and a healthy share of the global market. But there is more to it that makes the iPhone "sticky."
Image source: Getty Images.
Another massive appeal of the smartphone is its add-on services. iPhone users can download music from the Apple Music app, store selfies on their iCloud storage, and access their credit and debit cards with Apple Pay. After paying a small monthly fee for the services, iPhone users would be reluctant to switch to a competing smartphone if it meant potentially abandoning their photos or reentering all their personal payment info on another device.
NASDAQ: AAPL
Key Data Points
Apple still makes most of its revenue and profits from the iPhone, but the more profitable services segment is gaining steam rapidly. In 2017, when Apple first disclosed the data, services made up only about 14 % of Apple's overall revenue but carried a gross margin of 55 % compared to 35.7% for iPhones, Macs, and iPads. Through the first nine months of Apple's current fiscal year, services accounted for over 19 % of overall revenue, and its gross margin had increased to an astonishing 72.2%.
Apple has plenty of room to grow its services business and continue to expand its profitability. For instance, over the last 12 months, Apple Pay has transacted more payment volume than Mastercard, but 39% of Americans haven't yet heard of it.
2. Verisign has a monopoly on the internet
Verisign (VRSN +4.49%) is a lesser-known Buffett holding that Berkshire first bought in 2013. The company is entrusted by the Internet Corporation for Assigning Names and Numbers (ICANN), which is responsible for organizing and maintaining internet protocol. ICANN granted Verisign the exclusive rights to operate the registry of the .com and .net domains.
That means that any entity with a website ending in .com or .net must pay an annual fee to Verisign to authorize their webpage. In exchange for the monopolistic rights on its domains, Verisign is tasked with security and ensuring they're up and running 24 hours a day, every day. That's a huge responsibility, considering the company processes billions of daily queries. But on its most recent quarterly report, the company boasted 25 years of uninterrupted availability of its domains.
Over the last decade, the prolific growth of the internet and the number of web pages has allowed Verisign to nearly double its revenue from $772 million in 2011 to over $1.3 billion in 2021. Over that time, the company used profits to repurchase nearly a third of its shares. Those share repurchases are another reason Buffett owns the stock.
3. The future of surgery
Intuitive Surgical (ISRG +1.85%) makes robots that can perform routine surgical operations under its da Vinci brand with the aid of a surgeon. Knowing that the robotic surgeries would still require a licensed surgeon, the company used its first-mover advantage to start teaching surgeons to use the machine at colleges and universities. The advantage is that hospitals will be very reluctant to switch to a competing robot and force their surgeons to learn an entirely new system.
Perhaps more attractive to investors is that Intuitive Surgical sells disposable instruments needed for each surgery its robots perform. Those high-margin consumables add to the company's overall margin with every new robot it sells. As the surgery volume of Intuitive's systems has grown over the years, so has its recurring instruments revenue, which now pulls in more revenue than its systems. Analysts are expecting the robotics leader to grow revenue by nearly 13% in 2023, which would be a solid measure for the company that's rebounding from pandemic-related slowdowns.
Growth stocks at a discount
AAPL PE Ratio data by YCharts.
The year-to-date dip in Nasdaq stocks has allowed investors to buy shares of these three companies at a valuation they haven't seen this year. All three stocks are down considerably from their highest price-to-earnings ratio for the year. There's no saying when these stocks or the Nasdaq will recover. But when the index does recover, these three stocks could lead the charge. Buying the dip in these stocks could replace regret with joy in the long run.
