“The true investor welcomes volatility. A highly volatile market means that solid companies are regularly offered at irrationally low prices.” This quote from Berkshire-HathawayLegendary CEO Warren Buffett emphasizes the opportunities that can arise when stock prices fall significantly in the short term.
Even though the broader market is marching higher this year, there are still plenty of opportunities for investors to profit. With that in mind, read on to learn why two Motley Fool contributors believe buying these stocks while they’re still well down could help you generate market-beating returns.
This AI stock is trading at a surprisingly low earnings multiple
Keith Noonan: Super-Microcomputer (NASDAQ:SMCI) builds high-performance servers that are used in data centers. With NVIDIAWith its market-leading graphics processing units (GPUs) as key components, the company delivers powerful computers that can run advanced artificial intelligence (AI) applications.
With demand for AI processing on the rise, Supermicro’s revenue and profits have soared. In the company’s most recent fiscal year, which ended June 30, revenue rose 110% to $14.9 billion, while non-GAAP adjusted earnings per share rose 87% to $22.09.
It looks like the strong growth will continue. For the current fiscal year, Supermicro expects sales of between $26 billion and $30 billion. If the company achieves the midpoint of this forecast, this would correspond to annual sales growth of 87%.
Despite incredible growth and impressive near-term performance prospects, recent volatility has left the company valued at just 18 times this year’s expected earnings. Supermicro’s share price is also still 48% below its March peak. Why is the stock trading at such a deep discount compared to its growth rates?
First, the company has seen some margin declines, with gross margins coming in at just 11.2% last quarter, compared to 15.5% in the previous quarter and 17% in the fourth quarter of fiscal 2023. Investors are also concerned about the cyclicality of demand for AI processing hardware.
If demand for its high-end rack servers picks up significantly in Supermicro’s next fiscal year, it will likely become clear over time that the company’s stock was significantly undervalued at current prices. Some investors are betting that demand will stagnate or decline, but they may be underestimating demand for AI-based servers.
Many tech giants have already invested heavily in expanding their processing capacity, but there is no end in sight to the investment. Investment by mid-sized companies may also be at a much earlier stage of ramping up, and demand from government customers is likely to increase significantly over the next five years.
There is a lot of speculation involved in mapping out demand cycles for AI hardware, and Supermicro is undoubtedly a high-risk, high-reward stock. But with shares trading at low levels given the company’s growth rates and industry background, the server specialist appears to be a worthwhile buy.
ON Semiconductor’s strategic positioning makes sense
Lee Samaha: Electric vehicles (EVs), energy infrastructure (including renewables), advanced driver assistance systems (ADAS), EV chargers, industrial automation and 5G cloud are all great long-term markets, and that is why ON Semiconductor‘S (NASDAQ: ONT) Management positions the company there.
On the other hand, most of these end markets are under pressure in 2024. Relatively high interest rates continue to slow down car sales (including electric vehicles) and thus investments in electric vehicles and ADAS. In addition, the industrial automation market is going through a period of weakness due to weaker economic growth, dealer inventory reductions and slowing order growth.
That is why CEO Hassane El-Khoury continues to speak cautiously of an “L-shaped” recovery rather than the V-shape that countercyclical investors love so much.
His position is understandable. A recovery in auto sales and industrial investment will not happen immediately, as there is often a lag in spending when interest rates are cut as consumers and businesses wait to see how far rates will fall. Moreover, ON Semiconductor’s revenue consists of its customers’ investment plans, and it takes time for projects to be approved as automotive and industrial customers keep an eye on their end markets.
There is no denying that ON Semiconductor is well positioned in strong end markets, and many long-term investors prefer not to speculate on the right timing for the market. Management shares this view and recently committed to investing up to $2 billion in a manufacturing facility to support future growth, not least through a contract to supply Volkswagen with silicon carbide chips.
Despite promising opportunities on the horizon, ON Semiconductor stock is trading about 30% below its high. Moreover, at just under 19 times forward 2024 earnings, the stock appears to offer excellent value regardless of whether the recovery is merely an initial “L” or not.
Should you invest $1,000 in Super Micro Computer now?
Before you buy Super Micro Computer stock, consider the following:
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Keith Noonan does not own any of the stocks mentioned. Lee Samaha does not own any of the stocks mentioned. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.
2 Tech Stocks Down 48% and 30% to Buy Now was originally published by The Motley Fool
