The tide has been ebbing in the market lately – and especially on high-growth technologies. the Nasdaq Composite Index is down about 30% from all-time highs, but many individual stocks have been down even more than that.
The reasons for this vicious accident are many, but here’s the thing about tides: they don’t come out and stay indefinitely. Eventually, quality businesses will weather the storm and come back. Three Fool.com contributors believe that Qualcomm (QCOM 2.40%), MercadoLibre (MELI 9.96%)and Zebra Technologies (ZBRA 6.36%) will make a quick turnaround once the sale subsides. Here’s why.
A chip giant turns a new page
Nicolas Rossolillo (Qualcomm): For several years, investors pretty much forgot about mobile chip giant Qualcomm. As 5G mobile networks began to roll out and 5G-enabled phones hit the market, stocks began to emerge from their slumber as growth resumed. But then 2022 came and most of Qualcomm’s gains were suddenly erased.
I believe this is a mistake that investors will rectify sooner rather than later. Certainly, there are fears that there will be a slowdown in consumer spending on electronics and mobile devices. That doesn’t slow Qualcomm down much, though.
Revenue for the second quarter of fiscal 2022 (three months ended March 27, 2022) increased 41% year over year to $11.2 billion, and adjusted earnings per share rose 69% to $3.21. Free cash flow was $2.2 billion, a healthy margin of 20%. $1.7 billion of that was returned to shareholders via a dividend ($764 million, currently yielding 2.3% annually, and share buybacks worth an additional $951 million). This kind of investor-friendly behavior is exactly what will work well in a rising interest rate environment.
Qualcomm’s outlook was even better. For its third fiscal quarter, revenue is expected to rise another 30% to 40%, building on the 65% boom the chip designer enjoyed in the third quarter of 2021. Adjusted earnings per share are expected to rise 43% to 54% year over year. This outlook does not take into account the recent acquisition of Arriver’s advanced driver assistance software business.
Keep in mind that Qualcomm isn’t just a smartphone chip company anymore. While 5G is expected to keep its handset business on a steady slant for the next few years, its automotive and Internet of Things segments are booming as mobility technology begins to be mainstreamed into new industrial applications. Shares are currently trading for 21 times trailing 12-month free cash flow, but only 10 times expected one-year earnings. It’s incredibly cheap and a deal that won’t be ignored forever.
It’s a great entry point into global e-commerce businesses
Billy Duberstein (MercadoLibre): At its recent lows, Latin American e-commerce leader MercadoLibre was down nearly 68% from its highs of last summer, and it is still down more than 50%. This is despite the delivery of recent earnings results in sterling by most measures.
While many e-commerce businesses are seeing tepid growth as they weather tough comparisons from a year ago, MercadoLibre has continued to deliver, both literally and figuratively. E-commerce revenue grew 44% on 32% growth in gross merchandise volume (GMV) against tough comparisons. The higher revenue growth is due to MercadoLibre charging more for its growing logistics services, as well as increased merchant advertising. Both should allow MercadoLibre to continue to increase its catch rates and become more profitable in the future.
Meanwhile, its MercadoPago payments platform continues to grow like gangbusters, up 81.2% in the quarter, supported by a blistering 138% growth in off-platform payments. This means that customers use MercadoPago to pay for a wide variety of goods and services, and not just on MercadoLibre’s e-commerce platform. Given the size of the Latin American market and the continued penetration of digital commerce and payments, investors are expected to encourage these growth rates.
But that wasn’t the case – although that may have more to do with the macroeconomic and market-wide forces that have hurt all growth stocks. If there was one thing wrong with the report, it’s that operating margins fell from 6.6% in the prior year quarter to 6.2% last quarter.
However, MercadoLibre is still in hyper-growth mode, so fluctuations in operating income shouldn’t matter much. Additionally, management actually breaks down the various sources of profit and loss, and the decline in margins last quarter was due to higher investment in research and development and technology, as well as mounting credit losses. due to the hyper-growth of the consumer credit portfolio. In fact, the company grew revenue faster than cost of goods sold, sales and marketing, and general and administrative expenses. This is a good indicator that MercadoLibre will become more profitable as the business scales.
While some may be concerned about loan portfolio growth in this uncertain macro environment, management said consumer loan earnings were on target and within its models. It’s just that the consumer lending segment is a higher rate, higher loss business than merchant lending. MercadoLibre has a wealth of data on consumers and their spending habits, so it should be as advantaged as anyone in the region when it comes to underwriting loans.
Long story short, MercadoLibre looks like a much bigger and more profitable company in a few years. Yet with investors seemingly scrutinizing this quarter’s results amid rising interest rates, they appear to be missing the forest for the trees. It means opportunity.
Zebra stays ahead, even in tough market conditions
Anders Bylund (Zebra Technologies): The market-wide flight from growth stocks and other high-risk assets has dragged down many stocks that don’t belong in Wall Street’s trash can. Zebra Technologies has fallen nearly 50% in 2022, including a 25% decline in the past month alone, but there’s nothing wrong with Zebra’s business outlook.
The company has exceeded analysts’ estimates for higher and lower results in each of the last eight earnings reports. In the recently released first quarter update, for example, your average analyst was looking for earnings close to $3.87 per share on sales of around $1.37 billion. Instead, Zebra earned $4.01 per share on revenue of $1.43 billion.
Zebra specializes in data collection and management, backed by its industry-leading barcode scanning solutions and radio frequency identification (RFID) chips. You could hardly choose a more exciting niche to focus on right now. E-commerce vendors manage their inventory and shipping operations with Zebra technology. Healthcare systems use Zebra to manage patient records and hospital assets. Old-school retailers also rely on barcodes and RFID systems in their manufacturer-to-customer pipelines. This can be seen in Zebra’s surge in sales and its strong bottom line:
Zebra shares look so affordable right now that the company sees great value in buying back its own shares. About 1.5% of Zebra shares were retired in the last quarter, and buybacks continue today. This is the most enthusiastic takeover spree in the company’s history, and Zebra presents a fantastic buying opportunity to interested investors.