3 Top Stocks to Buy Now in a Once-in-a-Decade Opportunity


There’s no doubt about it, the bear market of 2022 has been painful, even confounding. Lots of high-quality businesses that are still growing and highly profitable have been tossed out on the curb like they’re last night’s trash. The Federal Reserve’s aggressive interest rate hikes in an attempt to fight inflation — perhaps at the short-term expense of the global economy’s health — is where all the eyeballs are focused right now.

Nevertheless, quality businesses are built to withstand this kind of pain, and will emerge even stronger once the storm clouds clear. Three Fool.com contributors think Qualcomm‘s (QCOM 2.71%), Roku‘s (ROKU -4.34%), and Amazon‘s (AMZN 1.88%) stock crashes this year are once-in-a-decade buying opportunities. Here’s why.

Get this monopolistic stock at a decade-low valuation today

Billy Duberstein (Qualcomm): It’s not often one gets to buy a wide-moat stock like Qualcomm for under 10 times earnings, but investors have that opportunity today. Even in difficult times over the past decade, Qualcomm’s price-to-earnings ratio has typically bottomed at 15. So, even a reversion to that would yield 50% upside.

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QCOM PE Ratio Chart

Data by YCharts.

Of course, the next couple of quarters will be tumultuous. In its fiscal fourth-quarter report released Wednesday, Qualcomm beat revenue expectations, but guided for a sequential decline in revenue and earnings per share. Weak smartphone demand and high inventories at sellers are causing an abrupt downturn in Qualcomm’s handset chip sales, which is its largest segment.

However, Qualcomm has a very high-margin core business, which should still generate cash flow in good times and bad. As the owner of key wireless patents, Qualcomm collects royalties on every handset sold. That division has sky-high operating margins of 73%, and brought in $4.6 billion in operating income over the last fiscal year. Even Qualcomm’s semiconductor chip segment has high margins at 34% in the past fiscal year, bringing in nearly $13 billion.

Even if there is a cyclical correction in handsets in the next year, it’s not as if 5G phone growth is over. In time, the market will return to growth once the economy recovers and inventories are cleared.

But what’s interesting about Qualcomm is that management, under CEO Cristiano Renno Amon, is cultivating other high-growth segments in automotive connectivity and the Internet of Things (IoT) for both consumer and industrial applications.

The IoT segment was really impressive over the past year, growing 37% and making up 18% of chip sales. Automotive revenue soared 41% to $1.4 billion. While automotive chips only made up about 3.6% of chip revenue in fiscal 2022, Amon noted on the recent conference call that Qualcomm’s automotive design win pipeline was $30 billion.

While the handset business is a growth business with a cyclical element, car models are employing more chip and connectivity across digital cockpit and advanced driver assist systems every year. Moreover, industrial and manufacturing companies are becoming more and more automated every year as well. So, these small segments should post growth even through a broader downturn.

With a rock-bottom valuation, a cash-cow legacy business, exciting secular growth drivers in the auto and industrial markets, and a dividend yield now close to 3%, Qualcomm seems to have a great risk-reward profile at this decade-low valuation.

Roku’s challenges are temporary

Anders Bylund (Roku): Media-streaming technology expert Roku reported third-quarter results on Wednesday. The modest third-quarter guidance targets given in July turned out to be overly conservative, and the company crushed Wall Street’s guidance-based estimates. Adjusted net losses per share were 31% smaller than expected and net revenue came in 10% above the consensus analyst view.

A financial performance like that normally sends share prices upward. However, Roku also set up another slate of soft guidance targets for the fourth quarter, and Roku’s stock price plunged right away. Roku shares were priced at $45.49 per share at the end of Wednesday’s extended trading session. The stock hasn’t seen prices this low since January 2019.

If you think that’s a fair price, I’m afraid you haven’t been paying attention.

Over the last four years, Roku’s active user accounts have swelled from 23.8 million to 65.4 million. Average annual revenue per user nearly tripled from $17.34 to $44.25. Together, the trends of surging user counts and rising revenue per user drove total revenue 339% higher over this period.

ROKU Chart

Data by YCharts.

And Roku is achieving these results amid a period of economic crisis with massive inflation and tight consumer budgets. These challenges will eventually pass, letting Roku return to the stronger growth trends of years past. Roku CEO Anthony Wood said as much on the earnings call.

“[The market slowdown] is definitely temporary,” Wood said. “The economy doesn’t even have to turn around. What needs to happen is there has to be more certainty in people’s minds about where the economy is heading, and that will cause people to come back in the market and start spending again.”

That prediction applies both to consumers and advertisers. I can’t say for sure when this recovery will start, but all signs point to a V-shaped rebound. Streaming media is the future of entertainment on a global scale. Roku offers a leading and service-agnostic media-viewing platform with a highly polished user experience.

Investors are looking at a long-term winner here, saddled with extremely low expectations and a price-to-sales ratio of just 2. Many ultra-traditional value stocks trade at twice that ratio, though they can’t hold a candle to Roku’s superior long-term growth. A more reasonable price-to-sales ratio for Roku would be in double-digit territory. And in the very long run, Roku is building a global entertainment empire with decades of profitable growth ahead.

So I would suggest picking up some Roku shares on the cheap right about now. You will probably want to thank me in a year or two, and again a couple of decades down the road.

Buy the cloud, but get a “decent” e-commerce business as a bonus

Nicholas Rossolillo (Amazon): Amazon stock has been overrun by a market that has completely lost interest in figuring out how to value it. In these days of hyper-focus on near-term profitability, Amazon’s heavy spending to set up its next spate of growth is deeply out of favor. Shares of the tech bellwether are down a whopping 45% so far in 2022.  

The third quarter of 2022 illustrates the issues Wall Street seems to be having. The e-commerce segment returned to growth in Q3 (North America and international net sales combined to increase 12.5% year over year to nearly $107 billion). However, e-commerce remained in the red on an operating income basis (North America operating loss was $412 million in Q3; international had an operating loss of $2.47 billion). As powerful as this online retailer is, investors are having a hard time wrapping their minds around this red ink as the company retools its operations for sustained expansion.  

Meanwhile, the cloud segment, Amazon Web Services (AWS) — which has been really paying the bills for years now — reported decelerating growth. AWS revenue increased “only” 27.5% year over year in Q3, hampered by the record run-up in the U.S. dollar (a side effect of the Fed’s interest rate policy). Operating income was $5.4 billion, a robust 26% operating profit margin. However, this was down from the 29% operating margin reported in the second quarter.

AWS’s profits more than offset the temporary losses in the e-commerce juggernaut. But the market has nevertheless pulled out its microscope and is focusing on the internet retail segment’s short-term dip into negative territory, rather than the power of AWS to keep the whole Amazon machine chugging higher.

Like the other tech giants, Amazon is being dragged down by the dollar’s strong advance, as well as a general slowdown in the global economy. However, Amazon is busy preparing for the long term. Its heavy pace of investing is keeping a lid on profits at the moment (shares trade for 72 times trailing-12-month operating income), but Amazon has been in this position before — only to reward shareholders with massive returns later on. If you’ve been looking for an opportunity to buy (or buy more of) this e-commerce and cloud computing leader‘s stock after an incredible decade of growth, now looks like the time to do so.



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3 Top Stocks to Buy Now in a Once-in-a-Decade Opportunity

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