2022 was a rough year for tech stocks as rising rates compressed the market's valuations and drove investors toward more conservative investments. But this year, the Nasdaq has risen nearly 30% as bargain hunters returned to the market.
That trend could continue if inflation continues to cool and interest rates stabilize. If the bulls stampede back toward tech stocks through the end of the year, ASML (ASML 2.04%), Snowflake (SNOW 3.69%), and Palo Alto Networks (PANW 0.91%) could all be great ways to play the market rebound.
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1. The semiconductor play: ASML
ASML's lithography systems are used to etch circuit patterns onto silicon wafers. It's the market leader in deep ultraviolet (DUV) systems, which are used to manufacture older and lower-end chips, as well as the world's only supplier of extreme ultraviolet (EUV) systems for the production of the market's smallest and densest chips. The world's three most advanced chip foundries -- TSMC, Samsung, and Intel -- all use ASML's EUV systems to produce their latest chips.
ASML's monopolization of the EUV market makes it a linchpin of the semiconductor market, which gives it incredible pricing power compared to other equipment makers. From 2018 to 2022, ASML's annual revenue rose at a compound annual growth rate (CAGR) of 18% as its EPS grew at a CAGR of 23%. From 2022 to 2030, it expects its revenue to grow at a CAGR of 10% to 14%.
It also expects its gross margin to rise from 50.5% in 2022 to 55%-60% in 2030. That's already a confident outlook, but ASML's habit of sandbagging its long-term guidance suggests it could grow even faster.
ASML faces some near-term headwinds regarding the slower growth of the PC market and restrictions on its sales to Chinese chipmakers. But looking past those challenges, ASML remains one of the easiest ways to invest in the secular expansion of the semiconductor market as more foundries install its top-tier EUV systems.
Its stock might seem a bit pricey at 31 times forward earnings, but its dominance of a crucial technology and robust growth rates easily justify that higher valuation.
2. The cloud play: Snowflake
Snowflake's cloud-based data warehousing platform collects all of an organization's data from various computing platforms, then stores that data in a centralized location where it can be easily accessed by third-party data visualization and analytics services. That approach breaks down the silos between a company's departments, ensures that everyone has access to the same data, and helps management make better data-driven decisions.
Snowflake's product revenue more than doubled in fiscal 2021 and 2022 (which ended in January 2022), then rose another 70% in fiscal 2023. But this year, it only expects its product revenue to rise 34% as the macro headwinds curb enterprise spending on big software upgrades.
That slowdown was disappointing, but Snowflake still expects to generate $10 billion in product revenue in fiscal 2029. That long-term outlook implies its product revenue will still grow at a CAGR of 31% from fiscal 2024 to 2029.
Snowflake's adjusted operating margin also turned positive in fiscal 2023, and it continues to expand its workforce as many of its peers execute mass layoffs. That confident expansion suggests it still has plenty of room to grow.
I was bearish on Snowflake throughout 2020 and 2021 because its valuation seemed unsustainable. But now that its stock has dropped more than 60% from its all-time high, I believe it looks reasonably valued at 18 times this year's sales. Investors who buy Snowflake today could be well-rewarded if it achieves or exceeds its fiscal 2029 targets.
3. The cybersecurity play: Palo Alto Networks
Palo Alto Networks is one of the largest cybersecurity companies in the world. It serves more than 80,000 enterprise customers, including most of the Fortune 100 and Global 2000 companies. Its business is split into three ecosystems: Strata for its on-site networking appliances; Prisma for its cloud-based security services, and Cortex for its AI-driven threat detection tools. Prisma and Cortex, which it calls its next-gen security (NGS) services, are its core growth engines.
From fiscal 2018 and 2023 (which just ended in July), Palo Alto grew its annual revenue at a CAGR of 25% as its billings rose at a CAGR of 26%. For fiscal 2024, it expects its revenue to rise 18% to 19% as its billings climb 19% to 20%.
Like many of its cybersecurity peers, Palo Alto faces some near-term macro headwinds. Nevertheless, it's still expanding its operating margins as it generates more revenue from its higher-margin software, reduces its supply chain costs, and slows down its pace of hiring. It's also remained profitable on a generally accepted accounting principles (GAAP) basis over the past five consecutive quarters as it reined in its stock-based compensation expenses.
Palo Alto's stock still isn't terribly pricey at 43 times forward earnings, and it will likely remain one of the most balanced plays on the growing cybersecurity sector for the foreseeable future.
