The bear market has been brutal this year even as businesses have continued to report higher revenue and earnings. Nevertheless, focus has shifted to 2023 financial outlooks, a possible recession, and a U.S. Federal Reserve "pivot" in which it halts (or slows down) its pace of record-setting interest rate hikes.
Many investors specifically are looking for this Fed pivot as a sign of a market bottom, holding off on making stock purchases until that happens. But there's no guarantee this would mark the bottom for this bear market.
In the meantime, there are deals to be had right now -- especially if you plan on buying and holding for at least a few years. If this is the case for you, three Fool.com contributors think The Trade Desk (TTD -3.37%), Lam Research (LRCX -1.23%), and Broadcom (AVGO -2.36%) are fantastic deals right now.
Yes, The Trade Desk is already recovering. No, you haven't missed the boat.
Anders Bylund (The Trade Desk): If you insist on pinpointing the exact market bottom with every investment, I'm afraid The Trade Desk isn't for you. The stock has already bounced more than 40% higher from July's two-year lows.
Investors with more realistic expectations should still feel free to load up on the online marketing automation specialist. The Trade Desk is still hanging out in Wall Street's bargain bin.
The Trade Desk also trades more than 50% below last November's all-time highs. At the same time, free cash flows and top-line sales are going nowhere but up, as the chart shows.
Data by YCharts.
The digital advertising industry is in a deep slump right now, as advertisers everywhere are reducing their marketing budgets in reaction to surging inflation rates around the globe. Even so, The Trade Desk delivered year-over-year revenue growth of 35% and 11% higher earnings in August's second-quarter report. Again, the company produced these robust results while knee-deep in an industrywide downturn.
Now imagine what The Trade Desk can do when the advertising sector sees sunlight again. You don't want to stand on the sidelines when The Trade Desk's stock chart turns up the heat. The 40% bump you missed over the last couple of months is easily forgotten when you're looking at multibagger returns over the next five to 10 years.
This bargain-priced semi stock could make a big rebound
Billy Duberstein (Lam Research): Semiconductor equipment maker Lam Research reported earnings last week, handily beating analyst expectations while also guiding well above expectations for the December quarter. And yet the stock remains more than 50% off its highs and trades at a single-digit P/E multiple.
This may be due to the fact that management forecast wafer front-end equipment spend to decline a little over 20% next year, after this year's record highs. The memory market is in a big downturn, and demand for logic chips used in consumer electronics such as PCs and mobile phones is soft as well. New regulations preventing sales of certain high-end equipment to China is also weighing on the outlook.
Of course, this isn't the first time semiconductor equipment investment has declined. Back in 2019, the industry saw a brutal downturn. That year, Lam Research's revenue declined about 13%, and its operating earnings fell by roughly one-third.
While one might think that means next year's revenue and earnings will decline by more, note that Lam generated more 37% of its revenue from its services and spares business last quarter. Services revenue is tied somewhat to the installed base, which should keep expanding.
That means that portion of revenue has a chance to grow next year. Even if it does decline, it will be a much smaller decline than equipment revenue. So revenue is likely to be down less than the decline in overall industry equipment spending.
Assuming Lam makes $10 per share next quarter, as it has guided, it would earn around $36.65 in calendar 2022. A one-third decline in earnings akin to 2019 would bring 2023 EPS to roughly $26.
Yet with the stock already trading in the low $300s, that is already a low-teens multiple on what should be trough earnings and just a single-digit multiple of this year's earnings. Following the 2019 downturn, Lam's operating earnings grew roughly 125% over the next three years.
Data by YCharts.
While the semiconductor industry tends to have booms and busts, the busts are generally shorter, and the overall trend is one of growth over the long term. While no one knows how long this decline will last, the last time Lam traded at this valuation was in late 2018. Investors who bought that dip went on to be handsomely rewarded indeed.
Don't miss out on this top dividend-paying chip stock
Nicholas Rossolillo (Broadcom): Shares of chip design juggernaut Broadcom have been clobbered 35% this year. It's faring better than the average chip stock (the iShares Semiconductor ETF is down 43%), but Broadcom stock's decline is still impressive.
This is a company growing at a brisk pace. Through the first nine months of the 2022 fiscal year, revenue increased 21%, and free cash flow is up 20%.
What gives? Focus has turned to Broadcom's proposed blockbuster acquisition of cloud computing company VMware. Broadcom has had great success acquiring software businesses in recent years, but this one would break records. If the deal goes through (expected in 2023), Broadcom will get its hands on this cloud infrastructure and software business for $61 billion (based on Broadcom's stock price at the time of the announcement). The deal will be funded via an estimated 50% cash and 50% new Broadcom stock.
Megadeals like this one can be tricky to pull off. It's possible regulators could put the kibosh on it (though Broadcom maintains its confidence they'll sign off on the merger). Then there's also the business of integrating VMware into Broadcom's existing software segment, which consists of various infrastructure monitoring and security products. By year three post-merger, though, Broadcom estimates the combination will add $8.5 billion a year in EBITDA (earnings before interest, tax, depreciation, and amortization).
The rub here is that Broadcom expects to need to raise another $32 billion in debt to finance its acquisition. The company has done well managing its debt and squeezing extra profit out of its takeovers in the past, but this would be a big new chunk added to the company's liabilities. As of the end of July, Broadcom already had $39 billion in debt on its books.
All this would explain the stock falling so much this year, as investors weigh the future actions of this chip design giant. In the meantime, the bear market has left Broadcom trading for just 12 times trailing-12-month free cash flow. Shares also yield a 3.8% annualized dividend, and management also just announced a new $10 billion share repurchase program. At the moment, Broadcom isn't hurting for cash, and it's returning that excess to shareholders. The pending VMware deal leaves question marks, but right now Broadcom stock looks mighty cheap.
