While many technology leaders are now bouncing back toward their yearly highs, some stocks -- even those involved in the hypergrowth economy of artificial intelligence (AI) -- currently trade at a discount.
These discounts could be due to a fixable problem, competition concerns, or just a lack of investor familiarity. But for each of the following three high-quality stocks, their recent downturns could be a golden buying opportunity.
CrowdStrike
In 1999 BusinessWeek quoted Warren Buffett as having said: "The best thing that happens to us is when a great company gets into temporary trouble ... We want to buy them when they're on the operating table."
Cybersecurity leader CrowdStrike (CRWD -0.34%) has certainly recently had an adverse development. The company sent out a software update on July 18 that promptly crashed Windows systems running its software. The incident led to mass flight cancellations, delays for noncritical surgeries, and general business disruption around the world.
The fallout caused a 35% pullback in the stock, which had soared to all-time highs just prior. And while CrowdStrike never really trades for "cheap," its price-to-sales ratio has pulled back to under 20. While not quite at the lows it had in early 2023, when inflation was soaring, the valuation is getting into that ballpark.
CRWD PS Ratio data by YCharts.
Make no mistake, the incident will be costly in the near term, with legal penalties, lost sales, or both. But there are a couple of things to keep in mind.
First, the incident wasn't due to a cyberattack, but rather to an unforced error in CrowdStrike's testing department. That seems like a fixable operational problem.
Second, prior to the incident, CrowdStrike was fast becoming the premier name in the cybersecurity industry. Its Falcon agents had pioneered the use of big data and AI to continuously improve its capabilities long before AI was fashionable. After assembling more and more product modules into its portfolio, CrowdStrike has become a true one-stop-shop platform with the ability to simplify its end-users' cyber spending.
That's why the company has reported peer-trouncing growth and profitability until now. Over time, I'd expect management to make the necessary changes to CrowdStrike's internal testing, and for the company to resume its profitable growth path. It may take a couple quarters to get back in the saddle, but long-term investors should take this pullback as an opportunity.
Alphabet
On Monday, Aug. 5, a Federal judge ruled that Alphabet's (GOOG -0.67%) (GOOGL -0.79%) Google was a monopoly maintained through exclusive distribution contracts from vendors such as Apple. Then this week, it was reported that the Justice Department was actually considering a breakup of the search giant. Combining those blows and its July post-earnings swoon, Alphabet has fallen 16% from its all-time highs. But the stock now trades at just 23 times earnings -- a sizable discount to the other names in the Magnificent Seven.
However, any sort of overaggressive move by the Justice Department would likely be appealed and could spend years in court. Meanwhile, most Wall Street analysts don't expect any drastic measures like a breakup passing the appeals process.
More likely, the government may force Google to stop paying Apple to become the default search engine on the iPhone. But that may not be such a bad thing. After all, Google reportedly pays Apple over $20 billion per year for that privilege.
While there may be a revenue hit associated with giving iPhone users more choice, the effect may be minimal when considering the cost. In a prior example, a few years ago, European regulators required Alphabet to offer users a choice of search engines on Android phones during the phone setup process. In the end, Google didn't lose any material market share.
Image source: Getty Images.
And though Alphabet's stock swooned after earnings, results were actually pretty good. Google Search continues to grow by double-digit percentages, as does YouTube. Google Cloud accelerated, up 29%, and is beginning to contribute in a more meaningful way to profits, with $1.17 billion in operating income.
Investors are getting nervous about the amount of capital expenditures going into AI investment, with Google nearly doubling its capex year over year to $13.2 billion. But all big tech companies are doing that; their stocks don't trade nearly as cheaply, and none has as much net cash as Alphabet does. Moreover, that investment could pay off, given that all of the "smart money" in Silicon Valley is doing it.
Alphabet invented a lot of the core technologies involved in AI, and one has to think Google's AI offerings will hold their own against the competition. As the cheapest of the Magnificent Seven stocks, Alphabet's recent headline-driven sell-off has made it a bargain.
Kulicke & Soffa Industries
Kulicke & Soffa Industries (KLIC -0.92%) isn't a household name, but its advanced packaging leadership means that many electronic devices you use were likely "packaged," or assembled, by the company's machines.
After demand soared during the pandemic, Kulicke & Soffa's core ball-bonder equipment for the packaging of high-volume general electronics, like phones and PCs, declined markedly. While those customers are now off their bottom, these markets haven't really recovered in a meaningful way. The company's industrial and auto wedge-bonding equipment also recently went into a downturn with the downdraft in the electric-vehicle market.
Management pointed out that the cycles for its bonding equipment typically last six quarters, and this downturn is approaching nine quarters, including the present one. Meanwhile, the company guided for flat revenue in the current quarter, while continuing to achieve a low but positive level of profitability.
But with that long of a down cycle, the next up cycle, likely next year, could be strong. Moreover, Kulicke and Soffa has a new high-growth segment in the fast-growing area of advanced packaging for chiplet semiconductors. Most future leading-edge chips will likely be made from optimized "chiplets," and this process trend is set to grow a lot.
On the earnings call, the company noted that its thermocompression bonding (TCB) tools for this application had grown from just $10 million in 2021 to a forecast $100 million next year. That would be about 14% of trailing revenue. And as TCB makes up a larger portion of the business, that could fuel strong growth in 2025.
Kulicke & Soffa is a highly cyclical business, earning as much as $7 in 2022 before falling to around $1 last year. Taking the middle of those two figures, the stock trades at just over 10 times its normalized earnings. Meanwhile, the company has continued to ramp up share repurchases. This is a small-cap tech stock to put on your radar.
