3 stocks of tech equipment to buy after profits
A new round of tech hardware upgrades is underway, and with the pandemic propelling digital change like never before, this phase of high demand for tech devices and infrastructure has no end in sight. Companies that cater to this market have indicated this during earnings season.
Three of those companies that look like good buys – for the rest of 2021 and for the decade to come – are Applied materials (NASDAQ: AMAT), Arista Networks (NYSE: DILL), and Nvidia (NASDAQ: NVDA).
Applied materials: Chip manufacturing equipment will only increase in complexity
When it comes to anything tech-related, it all starts with semiconductors. And as computing needs evolve and become more and more complex, higher order chips are needed. This is where Applied Materials comes in: it is one of the leaders in the design and supply of chip manufacturing equipment.
For the various chip manufacturing companies, AMAT is an essential partner. Its machines print conductive metals onto wafers, a process known as lithography, and handle other aspects of semiconductor production. It also has a division producing equipment used by manufacturers of ultra-high definition OLED displays. As the hardware becomes more complex, AMAT is relied on to produce the tools that can make it.
Business is booming, and not just because the global chip shortage has resulted in fabulous spending on new equipment to increase their manufacturing capacity. Electronic components are getting smaller, more powerful, and more energy efficient, and as such, their manufacture requires new lithography and related systems. In AMAT’s fiscal third quarter, which ended August 1, revenue increased 41% year-on-year to $ 6.2 billion. It also increased by 35% in the first nine months of the fiscal year. It is also a very profitable operation. Free Cash Flow (FCF) was $ 3.8 billion in the first nine months of fiscal 2021, an FCF profit margin of nearly 23%.
Historically, AMAT has been a cyclical business, as have most companies closely linked to the manufacturing sector. Its sales, and therefore its profits, fluctuate as its fabulous customers improve their operations in waves. But in the long run, semiconductors will remain a staple of the global economy. Applied Materials will be in growth mode – with a few bumps along the way – for a long time. But for now, it is in a phase of all-out expansion. Management expects a further 35% year-over-year increase in revenue in the last quarter of its fiscal year. With 25 times the free cash flow over 12 months, this stock looks like a great buy, even after rising 120% since the start of 2020.
Arista Networks: Internet remains a very disruptive force
Speaking of high-profile stocks, Arista Networks has also been in tears lately. After a period of ups and downs in 2018 and 2019, during the US-China trade war and a slowdown in data center construction, Arista’s stock has been up nearly 80% since then. the start of 2020. Its hike could be far from over, though.
The internet and all the services we rely on delivered through the web are must-haves. But it’s easy to take for granted the complex data highway that crisscrosses the planet. Arista designs key hardware for this infrastructure, particularly for data center and network operators. The pandemic has increased the amount of traffic traveling on highways and internet roads, triggering a new round of infrastructure upgrades.
From solutions for large data centers to smaller cutting edge IT departments to businesses setting up their own data centers, Arista has the technology that can help. Its software suite complements its hardware to manage and secure the data flows of its customers. The business is back in growth mode, with sales up 6% quarter over quarter and 31% year over year in the second quarter of 2021. Free cash flow is increasing. amounted to $ 508 million in the first half, a whopping 37% of sales. The company also has a stellar track record: $ 3.28 billion in cash and cash equivalents and no debt.
Trading at 32 times free cash flow over 12 months, Arista is arguably an expensive stock pick. However, the company exceeds its 2020 results, when many organizations froze spending on IT equipment and infrastructure in response to the pandemic. With revenue and earnings rising sharply (management forecasted 21% sales growth in the third quarter), and data center construction on the rise, the stock is currently a more reasonable buy than it might be. appears there at the outset. The internet will continue to reshape the economy for decades, and Arista could continue to play a role in upgrading and improving its basic infrastructure for a long time to come.
Nvidia: the new dominant name in semiconductor design
Nvidia is also exorbitantly priced: it is currently trading for 85 times free cash flow over 12 months, an incredible valuation for a company with a market cap of $ 560 billion. As unbelievable as it may sound, Nvidia continues to grow at a rapid rate despite its size. Sales in its Q2 2022 fiscal year, which ended August 1, increased 68% year-over-year to $ 6.5 billion, and free cash flow increased by 85 % to $ 2.5 billion.
This semiconductor designer has been in tears for over a year now, and his trajectory is starting to cool down a bit, but not by much. Management expects sales of $ 6.8 billion for the third quarter of the fiscal year, an annual increase of 44% on top of its growth rate of 57% in the third quarter of last year. His strong bounty is, at least in part, deserved, given that kind of momentum.
Of course, that all depends on Nvidia’s ability to keep the party going for a while. The evidence that he will be able to do so is piling up. The company’s graphics processing units are already at the heart of the video game industry, are widely used to mine cryptocurrencies, and are put to work to accelerate computing power in data centers. It also has a growing cloud-based software suite to help its customers improve their use of AI systems. Nvidia’s R&D in semiconductors and adjacent services is at the heart of all kinds of high tech.
This company is poised to continue to carry the torch for the semiconductor industry for the decade to come. With such a high valuation, expect some volatility in the stock price at some point. But for investors with long-term horizons, Nvidia is still a buy.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.