As we look back on 2022, it’s easy to lose sight of the fact that the stock market and our portfolios don’t reset each calendar year. Yes, a new year is an excellent time to review, plan, and rebalance, but the business cycle and our long-term financial goals continue. As bad as 2022 was, the SPDR S&P 500 Trust ETF has returned 56% over five years and 224% over the last ten, including dividends. The return is barrels more than inflation, bonds, and gold and certainly better than stashing cash in a saving account, as shown below.
SPY Total Return Level data by YCharts.
The simple truth is that stocks have to go down sometimes. But they can come roaring back quickly; look at the recovery after the March 2020 crash.
Tech stocks in particular had a rough time in 2022, but these companies integrate every facet of our lives and the economy. This makes many of them prime candidates to turn around quickly.
Amazon (AMZN -0.79%), Taiwan Semiconductor (TSM 3.09%), Palo Alto Networks (PANW 0.07%), and Google-parent company Alphabet (GOOG -1.10%) (GOOGL -1.17%) have terrific prospects.
Let’s take a look.
Amazon: The sleeping giant will awaken
The last couple of years has been a perfect storm for Amazon. The online shopping boost from the pandemic was tremendous, but the situation quickly turned sour.
Headwinds include:
- Logistical nightmares with clogged ports in 2021 and early 2022.
- A tight labor market which added billions of dollars in expenses.
- Record inflation and a strong U.S. dollar that crimped retail margins.
The good news is that these conditions won’t last forever. In fact, we are already seeing progress. The global shipping environment is improved, the labor market appears to be normalizing, inflation is falling, and the dollar value is moderating.
This doesn’t mean that Amazon is out of the woods, given the shaky economy.
But Amazon is far from finished, considering it:
- Has more than 200 million Prime subscribers worldwide.
- Owns 38% of the U.S. retail e-commerce market, with Walmart a distant second at just 6%.
- Has AWS, the most significant cloud-infrastructure services provider on Earth, with 33% of this growing market.
- Has revenue growth of 10% through the third quarter of 2022 despite the tough economy.
The stock trades at a price not seen since late 2018 when Amazon posted revenue of $233 billion. Amazon expects $509 billion in sales in 2022. This suggests that the market is so pessimistic that any good news could spark a furious turnaround. Dollar-cost averaging into Amazon at these prices could pay off handily.
Taiwan Semiconductor is an economic lynchpin
We saw the massive effect semiconductors have on the economy during the pandemic. New and used vehicle prices skyrocketed when auto companies couldn’t source enough semiconductor chips. This was a massive contributor to our inflation headaches. The companies that make chips are critical — and none more than Taiwan Semiconductor Manufacturing (TSMC).
TSMC accounts for over 50% of global-manufacturer revenue and supplies some of the most advanced chips. It supplies vital parts to Apple, Nvidia, Qualcomm, and others. This secular demand has allowed TSMC to grow revenue at 17.5%, compounded annually, since 1994.
The largest risk to TSMC is that China considers Taiwan part of its territory and could seek reunification by force. However, this action would have serious global ramifications, so many feel it is unlikely despite the saber-rattling. Warren Buffett and Berkshire Hathaway believe TSMC is worth the risk as Berkshire recently purchased $60 million shares, currently worth $4.5 billion.
TSMC is also taking advantage of the bipartisan CHIPS Act of 2022, which provides incentives to increase semiconductor manufacturing in the U.S. by investing $40 billion to open a second plant in Arizona.
TSMC has paid a dividend since 2004 and currently yields about 2.4%. After the stock’s 38% drop in 2022, it merits strong consideration from long-term investors.
Cybersecurity demand is strong
Organizations and governments fend off cyberattacks constantly, and this won’t end if we have a recession. Because of this, cybersecurity spending should be resilient in 2023 even though we may see small cutbacks.
Palo Alto Networks is an industry leader that had a stellar fiscal 2022. Revenue grew to $5.5 billion (29% growth); the remaining performance obligation reached $8.2 billion (40% growth); and adjusted free cash flow hit $1.8 billion (32% growth). The stock still fell 25%.
Palo Alto has transformed itself from a firewall provider to a software-as-a-service (SaaS) NextGen Security leader over the last few years. In 2018, the company was recognized as an industry leader in just one category; by 2022, it was recognized in 11 categories. Palo Alto has expertly positioned itself as a leader in a fast-growth industry, and the impressive results should continue.
Investors should note that the stock trades 15% off its five-year average price-to-sales (P/S) ratio.
Just Google it
Google-parent company Alphabet is in a similar situation to Amazon. Short-term obstacles, like a potential advertising spending slowdown in a recession, have caused a 32% decline in the stock price in the last year. Yet Alphabet has a tremendous future. Advertisers know just how important it is to be on the first page of Google Search. Merriam-Webster lists “Google” as a verb in the dictionary because the search engine is engrained in our culture.
Alphabet’s future is bright with the following:
- YouTube capitalizing on the trend toward online video streaming.
- $19 billion in Google Cloud revenue on 39% growth through Q3 2022.
- Innovations that harness artificial intelligence, such as Google Lens (enables searches from photos) and LaMDA (Google’s chatbot system).
The company approved another $70 billion share repurchases in 2022, which couldn’t come at a better time. With the stock price down, Alphabet can buy back more shares for the same investment.
Alphabet trades at its lowest price-to-earnings (P/E) ratio since 2014, making it another turnaround candidate for long-term investors.
Is the bottom in tech stock in? It’s hard to tell. But these companies should survive and thrive and are attractive at these prices.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Bradley Guichard has positions in Alphabet, Amazon.com, Apple, Palo Alto Networks, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Alphabet, Amazon.com, Apple, Berkshire Hathaway, Nvidia, Palo Alto Networks, Qualcomm, Taiwan Semiconductor Manufacturing, and Walmart. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
