After a great run in 2020, some tech hardware companies took a hiatus in 2021. Despite relentless demand for new technology, many big names in the tech world simply grew too quickly last year.
However, a year of stock market underperformance (the S&P 500 is up 18% year-to-date, in case you were wondering) doesn’t mean a growth story is over. On the contrary, a rebound in growth stocks could be in prospect for 2022. Three Fool.com contributors think Semiconductor manufacturing in Taiwan (NYSE: TSM), Quickly (NYSE: FSLY), and II-VI (NASDAQ: IIVI) therefore deserve serious consideration at this time.
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What happens when you can’t meet the demand?
Nicholas Rossolillo (Taiwan Semiconductor Manufacturing): While it might be at the bottom of the list of most tech household names, Taiwan Semi is a monster powering all kinds of high-end computing that we use every day. The company is the world’s largest chip manufacturing plant, holding an almost 60% market share in chip manufacturing last year. Given the persistent shortage of supply for anything electronics-related lately, it looks like this stock would have been a top buy for 2021.
Not so. TSM shares have only risen 3% so far this year – although they rose some 90% last year in the aftermath of the pandemic. Which give?
On the one hand, substantial optimism was incorporated into the headline ahead of the news headlines informing the general public of the severe shortage of available computer components. Also, given that this is a manufacturing company, there is growing concern that booming sales will not last forever.
Still, while the stock is lagging the market this year, that doesn’t mean TSM as a company has performed poorly. In contrast, in the first three quarters of 2021, revenue is up 17.5% from last year to 1.15 billion Taiwan dollars (US $ 41 billion). And despite heavy spending to increase manufacturing capacity, profits have remained robust along the way. Earnings per share are up 14.7% so far this year compared to last year.
More importantly, management said in the Q3 2021 earnings call that they expect very high profit margins to persist for years to come. Specifically, the gross profit margin on products sold – which has been high this year due to high chip prices – could remain above 50% “in the long run”.
Data by YCharts.
What does it mean? Taiwan Semi has a huge backlog of work to catch up with. But it is also a testament to the company’s ability to continuously innovate in producing smaller, more powerful products for smartphones, data centers, vehicles, and more. With the chip shortage set to continue through next year and possibly into 2023, a rally looks possible for this semiconductor leader.
Forget the TikTok drama
Anders Bylund (quickly): Network security and content delivery expert Fastly has recovered somewhat from the low market in early October, but the stock is still on sale. Stock prices have fallen more than 65% in 52 weeks, as if Fastly’s business growth is hitting a stone wall.
It’s a big misunderstanding that prepares Fastly’s investors for some fantastic returns on these rock bottom prices. It certainly doesn’t sound like dead growth stock to me:
Data by YCharts
Bears claim Fastly is suffering the loss of its biggest customer, as regulatory restrictions continue to cloud the company’s relationship with Chinese social media giant TikTok. It’s unfortunate, but not the end of the world. At the start of the coronavirus pandemic, TikTok’s content delivery orders represented more than 10% of Fastly’s quarterly revenue. Yes, he’s a big customer, but Fastly doesn’t live and die just by this contract. The company can now redirect network assets that were previously reserved for TikTok use to other customer relationships.
So Fastly earned a slap on the wrist when government orders split the company from TikTok. Instead, Fastly Stocks got a massive haircut.
The company is still in great shape, just to let you know. Sales were up 14% year over year in the August second quarter report. The number of Fastly customers has grown from 2,458 to 2,581. The net retention rate over the past four quarters was 135%, meaning that the average contract renewals were signed at a 35% higher value. compared to the chord it replaced.
Fastly is doing very well and is expected to get back on his feet soon as investors start to forget about the TikTok drama that fades away. In the meantime, you can buy fastly stock cheaply.
This declining value plays a role in high growth markets
Billy Duberstein (II-VI): Pronounced “two-six”, II-VI produces engineered materials for a wide variety of next-generation technology applications and has had a rather disappointing 2021. After a hot start to the year, II-VI has been on the decline since winning a bidding war for its rival Coherent back in March. Shareholders in early 2021 are now 24% poorer, and those who bought at the February peak are down more than 44%.
Data by YCharts.
After its fall, II-VI is trading at just 14.5 times its free cash flow for fiscal 2021. The Coherent acquisition is still pending, and that would add a lot of debt to II-VI’s balance sheet, but would also increase total profits, so future numbers might be different.
Still, concerns about Coherent’s price may be overstated; II-VI indeed has a long history of successful integration of acquisitions and synergies of its transactions. He is currently buying Coherent for around $ 6.8 billion, roughly 31 times next year’s profit estimates. It’s expensive, but management is also targeting $ 250 million in cost synergies as a result of the deal. Adding in the extra synergies, II-VI actually only pays between 14 and 15 times next year’s operating profit for Coherent.
The main activity of II-VI is in the optical communications market, where it generates two-thirds of its turnover. Still, Coherent’s deal will diversify II-VI’s portfolio into high-growth areas such as industrial lasers, semiconductor equipment components, and life science equipment. And there are some very exciting new growth engines on the horizon that aren’t even in the current results.
Specifically, II-VI is investing $ 1 billion over 10 years in the development of silicon carbide, a material that more efficiently converts power into torque and will be crucial in electric vehicle powertrains. From a small base of $ 500 million today, management sees the SiC market explode with the adoption of electric vehicles to reach a market of $ 30 billion by 2030, representing a growth rate annual compound of 50%.
Hopefully, the Coherent acquisition will be finalized in the coming months, and since the II-VI share price was beaten in 2021, 2022 is shaping up to be a year of potential rebound. After all, the stock is cheap and with a growing position in many exciting end markets, II-VI looks like a solid choice for value investors as the new year approaches.
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Anders Bylund owns shares of Fastly. Billy Duberstein owns shares in II-VI and Taiwan Semiconductor Manufacturing and has the following options: short January 2022 January 2022 puts on II-VI and January 2022 January 2022 sale on II-VI. Its clients may own shares of the companies mentioned. Nicholas Rossolillo owns shares of Fastly. Its clients may own shares of the companies mentioned. The Motley Fool owns shares and recommends Fastly and Taiwan Semiconductor Manufacturing. The Motley Fool recommends II-VI. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.