In recent days, growth stocks have been absolutely hammered, while high-dividend-paying value stocks have held up better or even risen. Thus, growth stocks may be more of a relative bargain today, and could be where investors may want to look to invest in January.
But many growth stocks don’t pay any dividends, giving yield-seekers concerned about rising interest rates a tough choice.
The following stocks each play in a strongly growing part of the technology market, and while their dividend yields are small today, it could be a much different story three to five years from now as their earnings per share compound.
ASML and Lam Research
Two stocks that outperformed last year but are still well below their highs are semiconductor equipment stocks ASML Holdings (NASDAQ:ASML), the leader in lithography, and Lam Research (NASDAQ:LRCX), one of two big leaders in etch and deposition machines.
ASML is more of a growth stock, trading at 50 times earnings and yielding 0.5%, so it’s been hit relatively hard lately, down about 19% from all-time highs in September. Meanwhile, Lam Research is a bit cheaper at 23 times earnings, yielding 0.9%. As a lower-multiple stock, Lam is down relatively less, about 10% below all-time highs.
Both companies benefited from two strong years of semiconductor investment, but many know we are still in a semiconductor shortage. That means semiconductor fabs around the world will need to buy even more machines to increase output, and basically every major fab buys machines from these two leaders.
The industry appears set for a third straight year of growth. According to industry trade group SEMI, front-end semiconductor equipment sales are projected to rise another 10% this year to $98 billion. In fact, with the exception of 2019, the onset of the U.S.-China trade war, the industry has grown in six of the past seven years.
That seems to lend credence to the theory that this formerly cyclical industry may not be so cyclical anymore. If that’s the case, these two stocks should probably garner a higher multiple.
Yes, ASML is somewhat expensive, but it has a monopoly on extreme ultraviolet lithography (EUV), which is the key tool in making leading-edge semiconductors. ASML’s earnings per share have rocketed 90% through the first three quarters of 2021, and that’s despite some supply constraints. That type of earnings growth can justify ASML’s high multiple.
Not to be outdone, Lam Research looks downright cheap, growing earnings 43% last quarter, twice its price-to-earnings ratio. Lam should hold its own as NAND flash investment is set to grow this year, and Lam garners an outsized portion of its revenue from NAND flash production.
Another element I really like about Lam is its high percentage of revenue coming from services, at around 32% — higher than its peers. Recurring services would hold up better amid any sort of downturn in equipment sales, as they are tied to the ever-growing installed base.
Second, Lam is among the most efficient businesses out there, with a return on equity of 76% and little to no net debt. That leaves room not only for growth but also healthy repurchases and growth for its dividend, which Lam raised by 15% earlier this year.
Prosus/Naspers CEO just bought $10 million in stock
Some might not realize South African holding company Naspers (OTC:NPSNY) and its large European investee Prosus (OTC:PROSY) pay investors a tiny dividend of roughly 0.2%. But they do, so they qualify for this article!
Of course, that dividend isn’t the reason to own these stocks. Both are part of the same complex that owns an impressive collection of high-growth tech companies across developed and emerging markets. The largest asset, which makes up about 75% of the asset base, is their combined 28.9% ownership of Tencent (OTC:TCEHY).
Tencent has come under pressure over the past year as Chinese authorities have come down hard on the tech sector. However, if any large tech company can weather the current storm and bounce back strongly, I think Tencent is the best-positioned Chinese tech stock to do so.
Prosus and Naspers also benefited recently from Tencent’s spinoff of its stake in JD.com (NASDAQ:JD). Tencent is itself a conglomerate with its own impressive investment portfolio, and appears to trade at a discount when factoring in those portfolio assets. So, the spinoff will give Prosus an extra 2.7% dividend in the form of JD.com stock, without a significant hit to Tencent’s stock price. In fact, Tencent’s stock is up since the spinoff announcement. Meanwhile, the billions in JD.com stock Prosus will receive give management even more optionality to hold JD or sell it for cash.
The main reason to own Prosus or Naspers is that they trade at a massive discount to the value of their Tencent stake alone, never mind the roughly $50 billion or so invested in other companies, both private and public.
Last Friday, Prosus CEO Bob Van Dijk purchased $10 million worth of Prosus stock in the open market. On Tuesday, he released a statement, saying, “Buying more Prosus shares reflects my personal conviction that our businesses have had exceptional momentum and that their value is not at all reflected in the stock.”
In response, both Naspers and Prosus rocketed higher on Tuesday, closing the discount to Tencent, but each still trades far below the value of their net assets. With Tencent a bounce-back candidate this year after a rough 2021, investors may wish to follow Van Dijk’s conviction. If he’s right, investors will benefit from the potential double-compounding effect of a Tencent rebound as well as a further closing of Prosus’ discount.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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