This is an excellent market for most tech investors!
Yes, you read that statement correctly. It may seem a bit detached from reality given the performance of tech stocks over the last year. And certainly, the process also demands more patience and involves more frustration than it did during the bull market.
Nonetheless, investors can become richer by picking stocks that beat the competition by transcending them. Such a focus could lead to outsized returns in Qualcomm (QCOM 1.25%), MercadoLibre (MELI 1.00%), and Shopify (SHOP 1.07%).
Qualcomm has prospered for decades by leading the smartphone chipset market, a market where it continues to dominate. As the first company to make chipsets for 5G phones, its position in this market remains unmatched.
Moreover, it has made plans for the day when many smartphone functions move to other devices. Thus, it has increased its competencies in the IoT and automotive segments. IoT has flourished, as it provides chips that power Meta's Oculus headsets. Also, its digital cockpit continues to grow rapidly, and will likely become more important as vehicles become more autonomous.
However, it faces challenges that have depressed the stock price. Slowing consumer spending has reduced growth in its smartphone business. Also, restrictions on chip sales to China have hurt the company, as it depends on that country for 65% of its revenue.
But amid those major challenges, its P/E ratio has fallen to just nine times earnings. That is comparatively low considering the slowed-but-respectable revenue growth rate of 22% in its fiscal fourth quarter (which ended September 25).
Additionally, Data Bridge Market Research projects a compound annual growth rate of 49% for 5G chipsets. If that holds true, Qualcomm appears positioned to recover as more temporary difficulties abate.
MercadoLibre is much more than just Latin American e-commerce. It has built synergies in both the fintech and logistics businesses, giving it a formidable moat in its home region.
Latin America is a cash-based society, a factor that presents a challenge to conducting business online. To address this, it created a fintech division called Mercado Pago. This move made it a pioneer in Latin American fintech, as it further prospered by offering the service to those not buying from MercadoLibre.
Moreover, since MercadoLibre can help e-retailers address logistics challenges, sellers have much less incentive to consider Amazon or other alternatives.
That ecosystem has probably helped MercadoLibre avoid a growth slowdown (at least so far). Its Q3 revenue came in at $2.7 billion, a 61% increase from year-ago levels. Q3 profit grew by 36% to $129 million during the same period due to higher operating expense growth and rising income taxes.
Still, analysts forecast revenue growth will slow to 24% next year. And with the stock down more than 50% from its high, it is not immune to the bear market. But with its competitive advantages and ability to derive growth as other tech peers stagnate, it could easily turn around as the market recovers.
Like MercadoLibre, Shopify has stood out by operating on a different plane from its competition. The e-commerce platform provider competes primarily with other software providers.
Still, it has transcended these peers by adding fintech, lending, inventory management, and other capabilities to its ecosystem. This allowed it to expand from its core market of small and medium-sized businesses to serve large enterprises through Shopify Plus.
Also, the construction of a fulfillment network provides a necessary component of e-commerce that its software-based competitors either cannot or will not offer. The ability to meet that need could make Shopify the only acceptable choice for many online sellers.
But despite its market strength, Shopify stock has fallen by more than 80% over the last year amid slowing growth and a bear market. Its Q3 revenue of $1.4 billion increased 22% versus the year-ago quarter. While respectable, it lags behind the three-year revenue compound annual growth rate for revenue of 52%.
However, the company expects above-average gross merchandise volume and decelerating operating expense growth. Also, its P/S ratio has fallen to eight, near record lows. Given this valuation and the growth prospects for its robust ecosystem, it should deliver for investors over time.