Looking at investing articles from 2009 and 2020, the worst years for stocks in the Great Recession and pandemic, the fear in the market was palpable. But there were brave souls with the foresight to look beyond the headlines – those who did were richly rewarded, as has been the case with every market correction. Forget bottom timing; it’s a fool’s race. Buying incrementally during those downtimes was ridiculously profitable.
What’s the lesson? Develop a long-term, mid-cost strategy and stick with fantastic companies. Alphabet (GOOG -0.26%) (GOOGL -0.11%), The trading post (TTD -1.42%), Skyworks Solutions (SWKS -0.32%), Amazon (AMZN -2.18%)and disney (SAY -2.27%) are down more than 20% since the beginning of the year (YTD) and deserve special attention.
1. Alphabet looks like a bargain
When a company’s main revenue generator is so popular that it becomes a verb, that’s a pretty impressive sign. You may even have “Googled” to find The Motley Fool. With Alphabet shares down nearly 23% this year, it’s time for investors to sit up and take notice.
Alphabet has multiple profit and growth engines. Its core Google search service is a must for advertisers, giving it incredible pricing power. YouTube is capitalizing on streaming growth and Google Cloud is expanding in the face of fierce competition.
Google’s advertising business, which includes Google Search, YouTube and the Google Network, increased sales from $95 billion to $111 billion year-over-year through the first half of 2022 amid difficult economy. Total operating revenue fell from $35.8 billion to $39.5 billion, even as management grappled with inflation and cuts to many advertising budgets. The increase in sales in the face of headwinds shows the power of Alphabet’s market stronghold.
Google Cloud competes with Microsoft Azure and Amazon Web Services (AWS) in the cloud marketplace. Sales have increased by almost 40% this year, but the segment is not yet profitable. Google Cloud is a fantastic opportunity for Alphabet to diversify its profit engines if management can successfully scale to profitability.
Alphabet is trading at a price-to-earnings (P/E) ratio of around 21, more than 12% lower than at the start of 2019, which makes the stock attractive.
2. The Trade Desk Capitalizes on Massive Change
As Alphabet corners the search advertising market, The Trade Desk is shaking things up in streaming. The Trade Desk offers advertisers a comprehensive platform enabling targeted advertising across multiple mediums, including the coveted Connected Television (CTV) market.
CTV refers to any content accessible via the Internet, such as watching netflix or Disney+ on a smart TV or using Roku or similar devices. It’s easy to see why this market is the new must-have for advertisers.
Trade Desk stock is down more than 25% this year after being caught up in the growth stock euphoria in 2021. But its results are terrific. Revenue reached $1.2 billion in fiscal 2021, marking a 43% increase from $836 million a year earlier.
The Trade Desk stands out from other growth stocks by producing generally accepted accounting principles (GAAP) earnings of $138 million in fiscal year 2021, as well as $379 million in cash from operations – an impressive margin of 32%.
The Trade Desk has momentum, opportunity and execution, and the stock is now trading near its pre-pandemic price-to-sales (P/S) ratio. This could be the time to accumulate long-term stocks.
3. Only one segment matters to Amazon’s future
Amazon shares have fallen 25% this year as investors worried about rising costs, logistical headaches and labor shortages that have crushed retail profits. But Amazon’s future is not in online retail. Its future is AWS, the world’s leading cloud service provider, and business is booming there. AWS accounts for all of the company’s operating revenue and a significant portion of sales growth this year.
AWS sales reached a record $62.2 billion in 2021 and $72.1 billion in the past 12 months. What is better? AWS has an operating margin of over 30%. Amazon also has a booming digital ad revenue stream that brought in $31.2 billion in 2021 and grew 18% last quarter. While some worry about short-term retail losses, long-term investors can buy the stock at a discount knowing that AWS (with an icing on the publicity cake) will generate profits for coming years.
4. Skyworks enables our increasingly connected world
Have you been to a big box store recently and seen these new smart fridges? Or maybe you’re tech-savvy and already own one. This is a fancy example of what is called the Internet of Things (IoT). The IoT includes devices ranging from cars to hearing aids. The future of our world is connected and the semiconductors (chips) manufactured by Skyworks are at the forefront.
Skyworks’ chips are also used in conventional applications such as smartphones, tablets, automobiles and gaming platforms. Sluggish demand and the expected economic slowdown have sent stocks down more than 35% since the start of the year. Despite the headwinds, the company increased the dividend by 11% last quarter. The forward yield is now close to 2.5%, a historically high level for Skyworks. Third-quarter fiscal 2022 revenue reached $1.2 billion on double-digit growth, and management guided continued double-digit growth in the fourth quarter of the fiscal year.
Chip stocks have been hit hard, but progressively buying Skyworks now could be very profitable in the future. In the meantime, investors can take advantage of the yield.
5. Do not doubt the mouse
Disney had a tough few years with pandemic shutdowns or limiting attendance, followed by inflation and fears of a recession. But the company has something up its sleeve: pricing power. Recent articles show that prices at Disney parks are rising much faster than inflation over many years. How can Disney do this? Because it has a unique product that people love that other companies can’t duplicate.
The stock is down about 28% this year because Wall Street expects the economy to weigh on earnings. And they’re probably right. But we are not beating the market by investing at the moment; we get ahead of the market by anticipating a company’s future position.
Disney has several profit drivers for the future. First, the parks are a unique experience that has been a rite of passage for generations. Revenue from this segment has grown 92% so far this fiscal year, reaching $21.3 billion over three quarters. Streaming services Disney+, Hulu and ESPN+ are adding subscribers at a blistering pace – 14.4 million were added in the last quarter alone. Additionally, the company believes it can capitalize on the sports betting craze with ESPN.
Some investors run for the exits when the market is selling. Others use a disciplined strategy to buy big companies at a discount. If you fall into the latter category, consider the great companies above.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Bradley Guichard has positions in Alphabet (C shares), Amazon, Microsoft, Skyworks Solutions, The Trade Desk and Walt Disney and has the following options: short calls of $100 in October 2022 on The Trade Desk and short calls of 147.50 $ in October 2022 on Amazon. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, Netflix, Roku, The Trade Desk and Walt Disney. The Motley Fool recommends Skyworks Solutions and recommends the following options: January 2024 Long Calls at $145 on Walt Disney and January 2024 Short Calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.