2 Tech Companies to Scoop Up When the Market Dips
The technology, or tech, sector consists of companies that create products and services in software, electronics, communication, artificial intelligence, and other IT-related industries. Tech is the largest out of the eleven market sectors, with a $15.65 trillion market cap.
Tech stocks had been steadily gaining throughout 2021 until September, when the stock market began to sell off. Tech stocks, represented by the Technology Select Sector SPDR ETF (XLK), were down 6% last month.
I believe this dip is giving investors an opportunity to invest in high quality tech stocks at discount prices. Two of my favorites are Microsoft Corporation (MSFT) and NVIDIA Corporation (NVDA). Today I’ll analyze both of these tech giants.
Founded in 1975, Microsoft Corporation is an American technology company that designs, licenses, and supports different software products and services, devices, and solutions around the world.
Year to Date (YTD), shares of the software developer have rallied over 32%. However, at the end of September the technology giant saw a 5% decline, giving investors an opportune time to buy the dip.
On September 29th, Microsoft announced that it had entered into a strategic collaboration with the healthcare data provider, Truveta, which includes a direct investment to accelerate its growth. Under the terms of the deal, Truveta’s clinical data platform will be implemented on Microsoft Azure, helping clinicians find effective new treatments utilizing real-world data and AI capabilities.
Recent Financial Results
In terms of financials, the company’s total revenue for its fiscal fourth quarter, ended June 30th, 2021, grew 21.5% year-over-year to $46.2 billion. Also, Microsoft topped the Wall Street revenue estimates by $1.9 billion. The tech giant reported a Non-GAAP EPS of $2.17, beating analysts’ consensus by $0.25.
For the next quarter, analysts project MSFT’s EPS to be $2.07, representing a 13.77% increase compared to the year-ago value of $1.82. Moreover, a $43.98 billion average revenue projection for the first quarter of fiscal 2022 implies 23.1% year-over-year growth. Besides, analysts expect that its 2022 revenues should lift by 14% to $192.07 billion.
Even with the recent pullback in MSFT’s share price, the company still looks expensive from the valuation standpoint. For example, MSFT’s FWD P/E Non-GAAP and FWD EV/EBITDA are 33.47x and 23.11x compared to the sector’s median of 24.55x and 15.35x, respectively.
Analysts have established a “Strong Buy” rating for MSFT, with an average price target of $336.19. By this admission, investors still have an opportunity to invest in MSFT at these discounted levels.
Based in Santa Clara, California, NVIDIA Corporation is one of the biggest semiconductor enterprises in the world. NVIDIA is best known for its graphics processing units (GPUs). The company is also diversifying its revenue streams as it enters the car software, streaming, and cloud gaming markets.
Since the beginning of the year, shares of the visual computing company have advanced about 61%. As for the past month, however, the stock has seen a 5% decline from its previous high.
On October 6th, European Commission announced that Nvidia had offered concessions to obtain EU antitrust approval for its $54 billion acquisition of UK-based chip maker Arm Ltd. The EU regulator didn’t reveal any details of the compromises and established an October 27th deadline for its decision. The acquisition approval could be the next meaningful catalyst for NVDA stock.
The company’s total revenue for its fiscal second-quarter of 2022 has risen 68.2% year-over-year to $6.51 billion, beating Wall Street estimates by $170 million. NVDA also posted record gaming revenue of $3.06 billion, up 85% compared to the year-ago quarter. Additionally, the GPU maker disclosed a Non-GAAP Q2 EPS of $1.04, topping analysts’ consensus by $0.02.
Analysts reached a consensus estimate of $1.1 EPS for the third quarter, ending October 30th, 2021, representing a 51% growth compared to the year-ago figure of $0.73. The $6.82 billion average revenue projection for the third quarter of fiscal 2022 represents a 44.20% increase year-over-year.
However, NVIDIA trades with lofty valuations. The company’s fiscal 2022 EPS projections of $4.14 imply a forward P/E of about 51.95x, which is significantly higher than the sector’s median of 24.55x. Besides, NVDA’s FWD EV/EBITDA of 48.10x is above the sector’s median of 15.35x.
Bullish Options Bets
The open interest levels for November 19th, 2021, $210.00 calls increased significantly during the October 7th trading session. According to data provided by Barchart.com, there was a purchase of about 19,243 contracts to bring the total to 26,441. It’s a huge bullish bet, with a transaction dollar value of about $22.4 million. A buyer of the calls would need NVDA stock to rise to $221.65 by the middle of November, representing an upside potential of 5% from current levels.
Wall Street analysts have rated NVDA as a “Strong Buy”, establishing an average price target of $239.52. This price target allows for investors to realize a sizable return if NVDA shares were purchased at current prices.