It seems like just yesterday, the talk of the investing world was about bear markets and recessions. In the blink of an eye, attention has turned to a potential new bull market and the incredible possibilities in tech and artificial intelligence (AI). This lightning-fast pivot highlights the folly of investing based on the news du jour or trying to time the market.
Don't look now, but tech is making a comeback. There are too many incredibly innovative tech companies for many of these stocks to stay on sale for long. AI is all the rage, but these aren't the only companies making waves. Here are three compelling investments to consider.
The future of surgery is now
Robotic-assisted surgery was the stuff of science-fiction stories not too long ago. Now it's a multibillion-dollar high-growth market with a clear leader: Intuitive Surgical (ISRG +1.85%).
Intuitive makes the da Vince surgical system, of which there are nearly 8,000 installed worldwide. According to the Mayo Clinic, the advantages of robotic-assisted surgery are that it's minimally invasive, has fewer complications, less pain, smaller scars, and quicker recoveries. Hospitals and insurance companies also like the shorter hospital stays.
In 2022, Intuitive Surgical posted $1.6 billion in operating income on $6.2 billion in revenue, despite a challenging economy and continued slowdown in elective surgeries post-COVID-19. Sales only grew 9% last year because of this, along with further lockdowns in China. But growth is accelerating again, coming in at 14% year over year in Q1, with procedures up 26%.
Procedure growth is key because it plays into one of Intuitive Surgical's biggest strengths: recurring revenue. If the company just sold the machines, the business would stall once the market was saturated -- and that's not a solid model. But the company makes around 75% of its revenue from recurring sources like instruments, accessories, and services.
This is a classic "razor-and-blades" model. Once systems get installed, they become cash cows that provide additional revenue continuously.
The downside is that ownership in this business rarely comes cheap. Intuitive Surgical stock is up 24% in 2023 and just 10% off its all-time high, reached in 2021. But the stock occasionally goes on sale, as it did during the bear market in 2022, so investors should keep watch.
It also has a hefty cash and investments hoard of $6.6 billion (6% of the market capitalization) that it's using to repurchase stock -- $350 million last quarter alone.
Finally, Intuitive Surgical isn't done innovating. It's harnessing AI and machine learning (ML) to produce the next generation of instruments and systems.
Don't forget the building blocks
Cutting-edge semiconductors made by Nvidia are getting all the publicity lately, and deservedly so. But this volatile highflier may not be the right investment for everyone. Boring old analog chips, like those made by Texas Instruments (TXN +0.90%), aren't necessarily high-tech themselves but make building advanced machines possible.
Analog chips bridge the real and digital worlds by measuring and translating things like temperature and velocity. Texas Instruments chips are critical to advanced driver-assist systems (like lane-departure warnings or automatic braking). As autonomous vehicles develop, analog chips will be in even more demand. Texas Instruments also has a large role in modern manufacturing plants. The company made 65% of its $20 billion in 2022 revenue from the automotive and industrial markets.
Few companies manage cash as well as Texas Instruments. The dividend has grown annually for 19 years (current yield 2.75%), cash flow per share has advanced at a compound annual growth rate of 11% during this time, and the share count has been nearly cut in half. Sales grew 38% between 2020 and 2022, and this year, management anticipates a pullback due to the economy. But make no mistake: The future is bright for this highly profitable cash-flow machine.
It's all about programmatic advertising
My first two stocks highlighted profitable, established businesses -- but what about a pick for the growth investor? The Trade Desk (TTD +5.53%) could be just the ticket.
Programmatic advertising is going to be the standard. This type of advertising involves the automatic buying and selling of space using a bid system. Customers use The Trade Desk's demand-side platform (DSP) to instantly purchase ad space across various media types like connected television (CTV), video, and display, based on preset criteria. It's advantageous for advertisers, who get flexibility, audience targeting ability (with The Trade Desk's first-party data), and feedback on effectiveness.
The Trade Desk's growth is explosive, soaring from $660 million in sales in fiscal 2019 to $1.6 billion last fiscal year -- a 39% annualized growth rate. But there's still a massive untapped market for the company.
Only 10% of sales came from outside the U.S. in 2022, but two-thirds of all ad dollars are spent there. The second area of growth is streaming television, or CTV. Steamers like Netflix are transitioning to ad-funded models, which will mean more opportunities for DSPs.
Much has been made of the advertising spending slowdown this year, again due to the economy, but The Trade Desk is still growing. Revenue increased 21% year over year in Q1, so the company's taking market share from its competitors. When the spending returns, it will receive an even bigger boost.
The stock is more high-risk and high-reward than the two above. It trades at over 20 times sales but is still 32% off its all-time high. It's best for growth investors willing to hold through volatility for the long haul.
Tech stocks aren't dead, as rumor had it last year. Quite the opposite. Tech companies will advance for years to come despite bumps along the way, and investors have many compelling options to consider.
