The best technology stocks rarely come cheap in bull markets. But despite the broader market hovering near its all-time high, a handful of high-quality companies’ stocks have stumbled, for reasons ranging from regulatory scrutiny to geopolitical fears. What do they all have in common? These companies dominate their respective industries.
That doesn’t guarantee their future success, but with some great stocks, the only times you’ll have a shot at buying in on the cheap will come when short-term adversity strikes.
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Below are three top-notch technology stocks currently in the bargain bin because they carry some extra baggage. All three companies are positioned for long-term growth that more than justifies their current valuations. Consider buying them while they’re down because they probably won’t stay so cheap once the storm clouds clear away.
Since the company lost an antitrust lawsuit in early August, there’s been a lot of noise around internet search giant Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG). Regulators are pushing for a forced sale of its Google Chrome web browser and for rules against deals that protect its video platform YouTube and artificial intelligence (AI) app Gemini from competition.
Alphabet makes most of its money from digital ads it displays with Google Search results and in videos on YouTube, so the thought that competitive pressure might rise on its ad business has kept the stock down. Alphabet now trades at a forward P/E of just 20 times expected earnings, a bargain for a company that analysts estimate will grow its earnings by an average of 17% to 18% over the next three to five years.
Changes are coming to Alphabet, but investors might be overreacting. Chrome’s value in a sale has been estimated to be as high as $20 billion, which would be a nice influx of cash for Alphabet. And the proposed restrictions might reduce the tilt of the playing field, but Google could stay a big winner anyway. Meanwhile, Alphabet’s cloud business is becoming an increasingly important part of the company. Investors may look back at this period of uncertainty about Alphabet’s future as a buying opportunity.
The United States and China are locked in an AI battle that has put ASML Holding(NASDAQ: ASML) in a precarious position. The Dutch company is the world’s only manufacturer of the extreme ultraviolet lithography (EUV) machines capable of producing the types of high-end chips that AI applications require. The U.S. is pressuring ASML, the Netherlands, and the European Union to block sales of those machines to China, which has been an important market for ASML.
These geopolitical pressures have sent the company’s stock tumbling almost 40% from its summer highs. Last month, ASML shocked the market with tepid guidance. Chinese customers had been aggressively ordering machines ahead of any potential restrictions. ASML’s guidance signaled that the surge of orders was cooling.
The semiconductor industry is cyclical, and ASML’s business seems to be in a softer phase. But that doesn’t change the fact that it has a monopoly on EUV machines, and long-term innovation in the chip space will likely fuel healthy demand for those machines. Analysts estimate ASML’s earnings will grow by 16% to 17% annually over the next three to five years. That growth rate would make ASML a solid deal at its current valuation of 32 times earnings.
Taiwan Semiconductor(NYSE: TSM) is in a similar situation. The company is the world’s leading chip foundry (manufacturer), accounting for approximately 62% of the world’s third-party semiconductor production. It’s a mission-critical operator in the world’s technology landscape. However, it’s a Taiwanese company. China has long claimed the independently governed island as a province of the mainland, and stated its intentions to bring it under Beijing’s control — by force if necessary.
It’s unclear whether the situation will escalate into an armed conflict, though Taiwan’s economy, including Taiwan Semiconductor, makes it a strategic asset China would love to have. The United States has historically aided Taiwan with trade, and has been working with Taiwan Semiconductor to begin diversifying its manufacturing footprint into locations outside of Taiwan. The company is investing more than $65 billion to build factories in Arizona.
Investors shouldn’t ignore the risk that China’s aggressiveness toward Taiwan could escalate, but at some point, the value proposition of this stock becomes hard to ignore.
Taiwan Semiconductor trades at a forward P/E of 27 today. That may seem high, but analysts expect Taiwan Semiconductor to grow earnings by an annual average of 31% over the next three to five years. Remember, Taiwan Semiconductor manufactures most of the high-end chips that are powering AI applications, including those designed by Nvidia. Taiwan Semiconductor’s jaw-droppingly low valuation relative to its estimated growth makes the stock worth considering, even with the geopolitical risks.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Alphabet, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
