Technology stocks weren't an abundant hunting ground for investors over the past year as the Federal Reserve's hawkish stance, a global economic slowdown, and fears of an impending recession sent companies in this once high-flying sector packing. But there are some names that bucked the trend and saw strong price gains of late.
Shares of Applied Materials (AMAT 2.00%) and Check Point Software Technologies (CHKP 1.27%) gained impressive momentum over the past three months. Their gains have outpaced the Nasdaq-100 index handsomely during this period. Let's look at the reasons these two Nasdaq stocks are worth buying right now.
1. Applied Materials
Applied Materials stock is up 47% in the past three months. That might seem a bit surprising considering the softness in the semiconductor market that has weighed heavily on some big names in this space. Market research firm Gartner estimates that semiconductor sales could decline 3.6% in 2023 to $596 billion following a 4% increase in 2022.
This should be bad news for Applied Materials, which supplies semiconductor manufacturing equipment to foundries that make chips. More specifically, Samsung, Taiwan Semiconductor Manufacturing (popularly known as TSMC), and Intel together produced 42% of Applied Materials' total revenue last fiscal year. TSMC was its largest customer with 20% of revenue.
But a closer look suggests that Applied Materials might be able to beat the weakness in the semiconductor market. That's because the company sits on a record backlog of orders, which it believes will help it overcome any drop in spending on wafer fabrication equipment in 2023. Applied Materials management said it "generated strong orders in Q4 [of fiscal 2022] and ended the year with record backlog." Specifically, the company ended the fiscal year with a $19 billion backlog, which was up 62% over the prior year.
It won't be surprising to see the backlog increase further thanks to a jump in spending by clients. TSMC, for instance, announced last month that it plans to build a second semiconductor plant in Arizona. In all, TSMC will be spending $40 billion to set up its manufacturing operations in the U.S. Meanwhile, Samsung seems to be in no mood to scale back its capital spending, either, as the South Korean company is going after a bigger chunk of the memory-chip market.
These companies form a nice chunk of Applied Materials' customer base, so they can help the company spring a positive surprise in the current fiscal year. Analysts anticipate a 6% drop in Applied Materials' revenue in fiscal 2023 to $24 billion, but there are reasons to believe this semiconductor stock could do better and maintain its impressive rally.
What's more, investors can buy Applied Materials at a cheap 15 times trailing earnings, which represents a discount to the Nasdaq-100's multiple of 25. They may not want to miss this opportunity considering the company's huge backlog and robust capital spending by its clients.
2. Check Point Software Technologies
Cybersecurity specialist Check Point Software saw its stock price jump 15% in the past three months thanks to impressive quarterly results that were released in November. The demand for Check Point's offerings remained robust amid the growing spending on cybersecurity solutions, which is evident from the company's performance in the first nine months of 2022.
Revenue increased 8% year over year during the first three quarters of 2022 to $1.69 billion. Fourth-quarter revenue guidance of $633 million at the midpoint suggests that it is on track to end the year with $2.32 billion in revenue, which would be an increase of 7% over 2021.
But it won't be surprising to see Check Point deliver stronger growth as its deferred revenue increased at a faster pace than the top line. The company had $1.65 billion in deferred revenue at the end of the third quarter, up 13% year over year.
Deferred revenue is the money collected in advance by a company in lieu of services that will be rendered later. So the faster growth in this metric as compared to the actual revenue suggests that customers are purchasing more of its cybersecurity subscriptions.
As it turns out, Check Point's product and security subscription revenue increased 13% in the third quarter of 2022, which was the third consecutive quarter of double-digit growth. Given that product and security subscriptions produced 60% of the company's revenue last quarter, a stronger contribution from this segment could help accelerate Check Point's growth.
The cybersecurity market is set for another year of solid increases. Gartner estimates an 11.3% jump in spending in 2023 to $188 billion.
As such, Check Point's steady growth should continue this year, and that could help this cybersecurity stock sustain its momentum. And, given that it is trading at 15 times forward earnings, it isn't too late for investors to buy this Nasdaq stock and take advantage of the potential upside.
