When assessing what stocks to buy, two things should come to mind: First, how bright is the company's future, and second, is the stock reasonably priced now? If both questions can be answered favorably, the stock should climb to the top of your shopping list.
Two companies that fit this description are CrowdStrike (CRWD -3.78%) and Taiwan Semiconductor (TSM -0.84%), and I think now could be a fantastic time to take a position in their stocks. Read on to find out why.
1. CrowdStrike
One of the major IT trends of the past few years has been increased cybersecurity. It's no secret that cyberattacks have ramped up, with many high-profile breaches occurring. Because of this, investing in cybersecurity companies is a brilliant idea as they provide a vital service to their clients.
CrowdStrike is among the top cybersecurity companies with its best-in-class endpoint protection platform and has ranked No. 1 in market share for three years in a row, according to the International Data Corporation's findings. While many companies deploy CrowdStrike's product to protect laptops or phones, they quickly add more capabilities. In fact, 62% of CrowdStrike's customer base utilizes at least five products, showcasing its ability to cross-sell.
Despite a more difficult selling environment throughout the latter half of 2022, CrowdStrike grew its annual recurring revenue by 48% to $2.56 billion in Q4 of FY 2023 (ending Jan. 31). While not profitable from an earnings perspective, CrowdStrike produces a ton of free cash flow (FCF), converting 33% of revenue into FCF in Q4.
CRWD Free Cash Flow data by YCharts
With solid revenue growth and impressive cash flows, you'd think CrowdStrike might be massively overvalued, but it's not.
In FY 2024 (ending Jan. 31, 2024), CrowdStrike expects to grow its revenue by 33% to $2.98 billion. If CrowdStrike can maintain its current FCF margin, it is slated to produce $989 million in FCF. Dividing its current market cap by that projected figure yields its price-to-forward FCF ratio of 30.9. For comparison, Microsoft's price-to-forward FCF is 30.6 and Tesla's is 49.4.
This shows how inexpensive CrowdStrike is as a growth stock. Even though the stock is up around 23% this year, the massive tailwinds of the cybersecurity industry will continue propelling CrowdStrike further, making now an excellent time to buy.
2. Taiwan Semiconductor
The chips industry has been highly competitive since its foundation. In recent years, Taiwan Semiconductor has stood out among its competitors in the race to produce more powerful chips. Taiwan Semi owns many semiconductor foundries that produce cutting-edge chips. These devices are used in most high-end electronics like cellphones, GPUs, and laptops.
Taiwan Semi outsources its capabilities to tech giants like Apple and Nvidia, becoming the go-to supplier for high-end chips, while not competing against them. Unless you think technological innovations will hit a brick wall, Taiwan Semi's products will likely continue to innovate and push the boundaries of what's possible.
The chips industry is currently experiencing a slowdown thanks to consumer demand falling. This caused Taiwan Semiconductor to issue guidance indicating a 2.9% revenue decrease in Q1 once New Taiwan dollars are converted back to U.S. dollars. It's not expected to get much better for Taiwan Semi in 2023, with Wall Street analysts projecting a 1.4% decline for the whole year.
Fortunately, those same analysts see a 21.5% growth rate in 2024. This projection likely includes a recovering economy, as well as Taiwan Semi's new 3 nanometer (3nm) chips making an impact. In Q4, 5nm and 7nm chips made up 32% and 22% of its total revenue, respectively. With these better chips hitting the market soon, its revenue is poised to explode to the upside.
Despite this, Taiwan Semiconductor trades at 16.6 times forward earnings and 13.4 times 2024 earnings. Compared to its historical range, the stock looks like a bargain.
TSM PE Ratio data by YCharts
Taiwan Semiconductor continues to innovate and produce better chips. With the stock trading at these levels, it looks like an excellent buy.
