Having spilled a lot of virtual ink lately about the nosebleed valuations that some Robinhood favorites are now being granted, I thought it would be worth shifting gears for a moment.
None of the following companies sell electric cars, exercise bikes or cloud services. But they're each solidly profitable, trade at low forward P/Es and have some growth drivers for the next 3-5 years. As always, readers are advised to do their own research before making any investment decisions.
Idea No. 1: Applied Materials (AMAT)
Market Cap: $77.6 billion
Valuation: Applied Materials trades for 17 times its fiscal 2021 (ends in Oct. 2021) EPS consensus, and 15 times its fiscal 2022 EPS consensus.
The Bull Case: Applied has top-3 positions (and in some cases, the leading position) in several major chip equipment markets. Growth drivers include steady growth in consumer and data center chip consumption; rising capital-intensity for advanced processor and memory manufacturing processes; and China's fab-building efforts. Also, rising OLED adoption should be a tailwind for Applied's display equipment business.
Risks: The chip equipment industry is still cyclical, albeit perhaps a little less cyclical than in the past. Sanctions could curtail China's wafer fab capex. Though still not that expensive, Applied's stock has rallied strongly over the past two months, so a pullback wouldn't be shocking if markets correct.
Idea No. 2: Synaptics (SYNA)
Market Cap: $3 billion
Valuation: Synaptics trades for 12.4 times its fiscal 2021 (ends in June 2021) EPS consensus, and 11.6 times its fiscal 2022 EPS consensus. The company does have $350 million in net debt that needs to be accounted for.
The Bull Case: After several years of seeing flat-to-declining sales and earnings, Synaptics has been shaking things up under CEO Mike Hurlston, who joined in August of 2019. The company ditched its pressured smartphone LCD TDDI (touch controller/display driver) chip business, and made a pair of acquisitions that expose it to a pair of growth markets (namely, PC-to-display interface chips and IoT connectivity chips). Its product line also includes offerings such as OLED touch controllers, automotive TDDI chips, and processors (SoCs) for headsets and IoT devices. And as Hurlston signaled in a recent interview, Synaptics remains open to making additional acquisitions to grow its scale.
Risks: Several of the markets Synaptics competes in, including IoT connectivity chips, OLED touch controllers and headset SoCs, are pretty competitive. Like many other chip suppliers, Synaptics is benefiting right now from strong consumer hardware demand, and it's possible that demand cools off in 2021.
Idea No. 3: Supermicro (SMCI)
Market Cap: $1.6 billion
Valuation: Supermicro trades for 13.4 times its fiscal 2021 (ends in June 2021) EPS consensus, and 9.2 times its fiscal 2022 EPS consensus. In addition, the company has more than $260 million in net cash.
The Bull Case: Supermicro is doing a good job of creating well-engineered hardware for growth segments within the server market, such as all-flash storage servers, hyperconverged infrastructure systems, servers for 5G infrastructures, and servers for handling AI/HPC and edge computing workloads. While a lot of Supermicro's sales involve traditional enterprises, the company also has meaningful exposure to cloud service providers and other Internet companies. Enterprise hardware demand is likely to pick up some in 2021 as offices reopen and macro conditions improve.
Risks: The server market is nothing if not competitive. Public cloud infrastructure adoption is a headwind for parts of Supermicro's business.
