The Federal Reserve packed the stock market last week with its hawkish stance and a 50 basis point interest rate hike that triggered a sell-off on May 5.
The Dow Jones Industrial Average it fell 3.12% that day, dropping 1,063 points in a single session. Tech stocks suffered more pain as the Nasdaq Composite down 4.99%. That was not surprising, as highly valued tech stocks tend to take a beating when interest rates rise. Add in rising inflation and a shrinking economy, and it’s easy to see why tech investors panicked and hit the sell button.
But the sell-off in tech stocks has opened up a huge opportunity for savvy investors to buy some fast-growing companies with great long-term potential at relatively attractive valuations. Let’s look at three of them.
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Apple and Micron Technology are solid bets in the 5G smartphone market
The growing adoption of 5G smartphones has turned out to be a huge tailwind for companies like Apple (AAPL 1.61%) Y micron technology (MU 1.44%) in different ways. While Apple has benefited from higher shipments and a rise in the iPhone’s average selling price, the growing need for more computing power and storage in 5G devices has given Micron a huge opportunity.
Apple delivered record revenue for the second quarter of its fiscal year 2022, which ended on March 26. Revenue rose 9% year over year to $97.3 billion, while adjusted earnings rose by a similar margin to $1.52 per share. The iPhone played a major role in Apple’s growth last quarter, generating $50.6 billion in revenue. This figure exceeded market expectations of $48.4 billion in iPhone revenue.
It’s worth noting that Apple’s iPhone revenue surged at a time when the overall smartphone market slumped. Global smartphone sales fell 11% in the first quarter of the calendar year, and Apple was the only major original equipment manufacturer to increase its shipments year over year, according to market research firm Canalys.
Apple controlled 18% of the global smartphone market at the end of the first quarter of 2022, compared to 15% at the end of the prior year period. More importantly, it looks like Apple will continue to dominate the 5G smartphone market and significantly increase its shipments in the long run, especially considering its moves to grow the customer base with products like the lower-priced iPhone SE.
And with cumulative earnings 25 times higher, Apple looks like a smart tech stock to buy given that it is trading at a discount compared to last year’s average earnings multiple of 32.
As for Micron, the memory specialist has enjoyed a good period of revenue and earnings growth amid favorable conditions in the memory market.
UM income (TTM). Data by YCharts. TTM = last 12 months.
The chipmaker’s mobile business unit (MBU) is its second-biggest source of revenue, generating $3.78 billion in the first six months of fiscal 2022, which ended March 3. The MBU has produced nearly a quarter of Micron’s revenue this fiscal year, with the segment up 15% from the prior year period.
Micron’s MBU is designed for long-term growth as 5G smartphones use more DRAM and NAND flash memory chips. According to management, the ongoing transition to 5G is driving 50% higher DRAM content and a doubling of NAND content.
With 5G smartphone subscriptions expected to grow from an estimated 664 million units in 2021 to almost 4.4 billion in 2027, Micron could enjoy healthy sales volume growth for DRAM and NAND. Add the company’s moves to increase its share of the memory market and it’s easy to see why analysts expect its profits to grow 30% annually for the next five years. Buying this semiconductor stock at this valuation seems like a no-brainer considering it is trading at just 8.8x earnings despite its excellent growth and strong potential.
Video games and data centers could trigger this stock
The video game and data center markets have been booming in recent years, and nvidia (NVDA 3.81%) has been earning much of the same.
Nvidia’s graphics cards power data centers and personal computers, and the company has a strong position in both markets. In gaming GPUs (graphics processing units), Nvidia has an 81% market share according to Jon Peddie Research.
It enjoys a similar share of the data center chip market. The dominant position in these markets is great news for Nvidia, as data center GPU demand could top $20 billion by 2027, growing 42% CAGR.
Similarly, PC graphics card market revenue could reach $54 billion by 2025. Now, Nvidia has already seen huge growth thanks to these two markets. The gaming and data center markets produced almost 86% of the company’s total revenue in fiscal 2022, which ended on January 30. Driven by these markets, the chipmaker’s total revenue soared 61% last fiscal year to $26.9 billion, while adjusted earnings per share jumped 78% to $4.44.
With Nvidia poised to boost its presence in data centers and positioned for a huge opportunity in the automotive space, it’s no surprise to see analysts expect it to post more than 30% annual earnings growth over the next five years.
Lastly, the valuation makes Nvidia an attractive growth stock to buy right now. It is trading at 48 times ending earnings compared to 90 times last year, and could grow at a faster pace than expected thanks to its impressive holdings in a couple of big markets and the emerging opportunities it finds itself in.
