While the tech-focused Nasdaq Composite index inched higher over the last three months, lithography leader ASML (ASML +4.89%) and Singapore-based e-commerce and fintech business Sea Limited (SE 2.15%) moved in the opposite direction.
With the market worrying over ASML's slower growth amid a down cycle in the semiconductor market and Sea Limited facing a prolonged slowdown in sales growth, the once-hypergrowth stocks declined 18% and 39% in the last three months.
However, several positives at each company should make these temporary issues insignificant over the long haul. Here's what makes ASML and Sea magnificent supercharged tech stocks to buy at today's prices.
ASML
Maintaining a dominant position in deep ultraviolet (DUV) lithography and a monopoly on extreme ultraviolet lithography (EUV), ASML is an outstanding growth stock to dollar-cost average (DCA) into on dips. The company's leadership advantage in lithography -- a light projection system that etches patterns into the silicon wafers used in semiconductors -- provides a valuable source of revenue.
NASDAQ: ASML
Key Data Points
Without peers proving capable of competing with ASML's technology, the company delivered total returns of more than 3,600% over the last 20 years. As impressive as this past performance is, ASML's future may be even brighter.
Research company Fortune Business Insights expects the semiconductor industry to grow by 12% through 2029, highlighting a clear megatrend that ASML's operations are essential to. Furthermore, as increasingly complex technologies arrive -- such as artificial intelligence applications, self-driving vehicles, virtual reality, and high-speed data transmission everywhere -- ASML's bleeding-edge EUV unit should see outsize growth.
Best yet for investors, the company's virtual monopoly helps allow for some of the best net profit and free cash flow (FCF) margins on the markets at 27% and 20%, respectively. These figures are even more impressive because they come amid a down cycle in the cyclical semiconductor industry. Regarding this downturn, CEO Peter Wennink noted very high inventory levels across the semiconductor industry, spurring a slowdown in the ordering and utilization of ASML's tools.
However, the company is positioned to handle this temporary slowdown thanks to its massive backlog worth 38 billion euros. This accumulation of orders equals more than a full year's revenue for ASML and should keep it busy until the broader industry recovers in 2024, as Wennink believes.
The cherry on top of it all for ASML investors?
Over the last decade, management returned roughly 87% of its total FCF to shareholders through stock repurchases and dividends. Thanks to these cash returns, ASML lowered its share count by 10% since 2013 while paying a 1.1% dividend that jumped by over 700% in the same time.
ASML Shares Outstanding data by YCharts
With a price-to-FCF (P/FCF) ratio of 39 and a price-to-earnings (P/E) ratio of 30, ASML's authentic valuation probably lies between these two figures. Despite being somewhat lofty (perhaps rightfully so for a monopoly), these ratios are well below their five-year averages and seem like a no-brainer entry point for investors as analysts expect solid 14% sales growth in the upcoming year.
Sea Limited
One of the many "pandemic darlings," Southeast Asian e-commerce, gaming, and fintech upstart Sea Limited's stock rose over 2,000% from 2019 to 2021, guided by incredible triple-digit sales growth rates. However, in the years since, Sea Limited's stock has returned most of these gains as revenue growth decelerated to just a meager 5% increase in its most recent quarter.
NYSE: SE
Key Data Points
Despite this steep drop, Sea Limited's three business segments -- Shopee (e-commerce), Garena (digital entertainment, gaming), and SeaMoney (digital financial services) -- look primed for a recovery thanks to recent developments:
- Shopee profitability: In addition to growing by 21% in its most recent quarter, Shopee recorded its third consecutive quarter of positive operating income. While only equaling a 3% operating margin, this profitability is far from last year's second quarter when Shopee's margin was negative 43%, highlighting the company's success at streamlining its cost efficiencies.
- Garena's Free Fire is back in India: After being banned by India in February 2022 over national security concerns, Sea Limited's largest game (and one of the largest games in the world, with 40 million monthly active users before the ban) is being allowed back into the country. Securing a partnership with Indian data center specialist Yotta a few weeks ago, Sea Limited's most profitable segment looks poised to restart its growth after bookings declined 38% compared to last year during the ban.
- SeaMoney continues its incredible growth: Alongside revenue growth of 53% in Q2, Sea Limited's digital financial services segment delivered a stellar operating profit of 28%. This outsize margin helps provide further stability to overall profitability, meaning the company no longer relies upon Garena's profits to fund its operations.
Thanks to the improving metrics within each of these segments, the company's improvement in net profit margin has been nothing short of astounding over the last three years.
SE Profit Margin data by YCharts
Best yet for investors, Sea Limited's price-to-sales (P/S) ratio of 1.8 is barely above all-time lows, signaling that the market thinks the company's growth story is over. However, with analysts expecting 13% growth in the upcoming year and all three of the company's segments profitable and poised to grow, Sea Limited looks like a supercharged tech stock about to take off again.
