Warren Buffett once said, "You pay a high price for a cheery consensus," and the mood around high-growth tech stocks couldn't get much worse. This year's inflation and subsequent interest rate shock has caused even best-of-the-best tech stocks to decline significantly.
However, the future looks quite bright for these three all-stars over the long-term, making today's discounted valuations look like absolute long-term bargains.
1. Amazon: Multiple incredible moats
It has been somewhat shocking to see Amazon.com (AMZN -1.14%) stock fall about 50% this year, especially since the underperformance seems to be based on temporary, fixable problems.
Coming off the COVID boom in e-commerce sales, Amazon decided to go full throttle in expanding its infrastructure, doubling its fulfillment and logistics footprint in just a year and a half -- a footprint that had taken 25 years to build prior to COVID.
Since building decisions operate with a lag, that meant Amazon was still spending a lot of money even as inflation reared its head and sales slowed this year. Amazon's steadily growing profitability reversed, with negative free cash flow in 2022.
In addition, Amazon's all-important cloud computing unit, Amazon Web Services, slowed, as high energy and labor costs caused AWS clients to look to save money and limit usage, which Amazon helped them achieve.
AMZN Free Cash Flow data by YCharts
Ironically, Amazon's current difficulties may actually deliver long-term benefits. The massive build-out likely put Amazon in a class by itself in terms of delivery infrastructure, as there's no way competitors could spend as much to catch up, especially in this difficult environment. Moreover, the cost crunch enterprises are facing should only accelerate their move to the cloud, which ultimately helps enterprises save on the costs of building and managing one's own data centers.
The elevated costs Amazon is seeing in its own business should also improve next year. CEO Andy Jassy is undergoing a major review of Amazon's cost structure, which the financial media has reported could result in 10,000 layoffs through next year. As the original retail business becomes more streamlined and automated, it should become a profit driver as Amazon grows into its larger footprint.
On a bigger-picture level, Amazon has a very strong, entrepreneurial, and growth-oriented culture, with multiple attractive businesses and future optionality. At its current market cap of around $850 billion, some might say Amazon's entire market cap could be reflected in the value of its profitable AWS division alone.
Given Amazon's ventures into so many other high-potential businesses of digital ads, media, satellite internet, physical retail, robotics, artificial intelligence, and more, shareholders appear to be getting a whole lot more than what they're paying for in Amazon's stock today.
2. Prosus: How to play a big China recovery without investing directly in China
Another "buy one business, get several others for free" situation lies within European holding company Prosus (PROSY -0.53%) and its cross-held company, South Africa's Naspers (NPSNY -0.45%).
Prosus' main asset is its huge stake in China internet giant Tencent (TCEHY -0.92%), which encompasses about 80% of Prosus' portfolio. The remainder is invested in high-growth businesses, such as online classifieds, food delivery in Europe and Brazil, fintech in India, online education technology, and other e-commerce businesses.
Investors have been downbeat on Prosus, which has attempted to diversify its business away from Tencent by selling shares and buying into these other segments. However, these other businesses aren't very profitable, even though they are growing fast, and China's economic downturn over the last two years also took a toll on sentiment.
But that actually shouldn't matter much. Prosus trades at a huge discount to the value of these businesses, and even to the value of its Tencent stake alone. As of last week, Prosus estimated its asset value at 99 euros per share and its Tencent stake at 81 euros, whereas Prosus' entire stock price is only 63.5 euros per share.
The silver lining is that this tough year spurred a change in management's strategy: Since June, Prosus' management has decided to sell shares of Tencent on a daily basis and then repurchase its own shares simultaneously. Since Prosus trades at such a discount, this creates immediate value for shareholders -- even increasing Prosus shareholders' exposure to Tencent on a per-share basis.
Moreover, management is now laser focused on profitability for the other businesses, rather than growth at all costs. Prosus management just recently laid out a target to bring the other businesses to profitability in aggregate by the first half of fiscal 2025, which is March through September of calendar 2024. Even more helpful, management is disclosing target margins for each of the other businesses, with every segment having double-digit margin potential.
Data source: Prosus Capital Markets Day presentation.
Moreover, Naspers and Prosus offer an interesting way to play a recovery in the beaten-down Chinese economy through Tencent's business, without having to invest directly in a Chinese stock. As investors have learned, there is a lot of uncertainty regarding the status of U.S.-listed Chinese stocks, which must pass an audit every three years to stay listed on U.S. exchanges. But since Prosus is a European company and Naspers is a South African company, these stocks offer a way around some of the more direct China-U.S. complications.
3. Super Micro Computer: The rare 2022 winner that should keep on winning
The stock of Super Micro Computer (SMCI -2.96%) has managed to double in a year in which the S&P 500 is down 18.1% and the Nasdaq is down 32.3%, so you know there is something unique going on here.
Super Micro had been thought of as a low-growth, low-margin server assembler in its past, but 2022 saw years of strategic planning and a favorable environment come together in a big way.
Super Micro makes data center servers, and prides itself on two characteristics: a low-cost building block architecture and extremely energy-efficient designs. To that end, founder and CEO Charles Liang also developed a "total IT solution" over the past few years that encompasses full rack systems, software, and services offerings. And the company just opened a new low-cost Taiwan manufacturing plant in 2021, which began shipping late last year.
Factors like the cost of energy skyrocketing this year and data center operators more focused on energy and cost efficiency play right into Super Micro's hands. Moreover, Super Micro's low-cost manufacturing and software and security offerings came to market at the same time, just as demand for energy-efficient servers soared. As you can see in the chart, that has led to a reacceleration of revenue and profit growth.
SMCI Revenue (TTM) data by YCharts
After its market-trouncing gains, could Super Micro still be a buy? Liang had previously outlined a goal of reaching $10 billion in revenue when Super Micro was right around $3 billion several years ago. It appears the company may reach that goal as soon as 2024 at this rate. And on recent conference calls, Liang has unveiled an even bigger long-term goal of reaching $20 billion in revenue -- more than triple the current size of the business.
Given that Super Micro only trades at a P/E ratio of 10, and that Liang has backed up his prior goals with results, it wouldn't be surprising to see Super Micro continue to outperform, even after this all-star year.
