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After a historic first-half rally to start the year, the Nasdaq Composite ($NASX) ran head-first into the Fed's hawkish “higher for longer” outlook, as well as bearish September seasonality. As investors flee riskier assets, like equities, in the face of rising bond yields, the Nasdaq is now down more than 6% month-to-date.
While the heightened volatility can be hard to stomach for investors, it's important to remember these pullbacks are often best utilized as opportunities to pick up quality stocks at a relative discount. And at current levels, some top names in the tech sector now look particularly appealing.
Here's a look at three top picks to scoop up now.
Apple
The impact of Apple (AAPL) goes beyond the tech sector as the Cupertino-based giant has become a cultural phenomenon now. With its iPads, Macbooks, iMacs and its most popular product - the iPhone - Apple is one of the most recognizable consumer brands worldwide.
It's also a stock market juggernaut, and was the first publicly listed U.S. company to hit a trillion-dollar market capitalization back in 2018. Over the past five years, Apple's revenues and EPS have clocked a CAGR of 8.51% and 16.62%, respectively, and AAPL now has a market cap of roughly $2.68 trillion. The stock offers a dividend yield of 0.55%.
Apple stock, however, has had a tough run over the past month, shedding 9.4%. The shares are still up 31% on a year-to-date basis - outperforming the Nasdaq's 25% gain.
Apple's results for the latest quarter beat analysts' expectations, but investors punished the stock in response to a closely watched miss on iPhone sales. Apple's net sales for its fiscal third quarter came in at $81.8 billion, down 1.4% from the previous year. EPS grew by 5% yearly to $1.26, which was above the consensus estimate of $1.20. Notably, Apple's EPS has topped estimates in four out of the past five quarters.
So far, the latest iPhone models are quite a hit with the masses globally (yes, even in China). In fact, Morgan Stanley reports that lead times for iPhone 15 have hit record highs, underscoring strong demand. Already, Apple's share in the U.S. smartphone market increased to 55% from 52% at the end of the second quarter - and the company's new offerings, like the Vision Pro, are also expected to drive future sales.
Heading into a seasonally strong period for iPhone sales, analysts are projecting Apple to report an earnings growth of 7.8% in the current quarter and 11.7% in the next quarter.
Overall, analysts are predictably upbeat on AAPL. The consensus rating is a “Moderate Buy” rating with a mean target price of $205.81. This indicates an upside potential of about 20% from current levels. Out of 29 analysts covering the stock, 18 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 8 have a “Hold” rating.
Microchip Technology
Founded in 1989, Microchip Technology (MCHP) operates in the semiconductors industry, with a leading presence as a supplier of microcontrollers. The company designs, manufactures, and sells embedded control solutions for a wide variety of applications, including automotive, industrial, consumer, aerospace and defense, and communications.
Microchip Technology currently commands a market cap of $41.39 billion and offers a dividend yield of 1.94%.
The stock is down 6.5% this month, keeping pace with weakness in the broader Nasdaq. Longer term, MCHP is a bit of a laggard, having gained only 10% during a generally stellar year for tech stocks.
In its fiscal first quarter, Microchip reported net sales of $2.29 billion, up 16.6% from the prior year, and marking the 11th consecutive quarter of revenue growth. EPS rose by 19.7% from the prior year to $1.64, matching analysts' estimates. Over the past five quarters, Microchip has matched or exceeded analysts' earnings expectations every time. Notably, the company's EPS has expanded at a 5-year CAGR of 78.03%.
Along with debt reduction, the company's free cash flow also grew by 22.8% from the prior year.
Despite the in-line earnings report, MCHP fell after the results as investors responded to downwardly revised earnings and revenue guidance that came in at the low end of consensus expectations. Plus, the company now expects revenue to range between $2.22-$2.31 billion for the current quarter, snapping its long-time streak of revenue growth.
Analysts are targeting earnings growth of 11.5% for the current quarter and 1.6% for fiscal 2024.
The consensus rating is a “Moderate Buy” rating on the stock with a mean target price of $98.26. This denotes an upside potential of about 28% from current levels. Out of 19 analysts covering the stock, 11 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 6 have a “Hold” rating.
Shopify
We conclude our list with Shopify (SHOP), a Canadian e-commerce company with operations in more than 175 countries worldwide. Shopify offers a range of services including payments, marketing, shipping and customer engagement tools.
With a current market cap of $66.06 billion, Shopify does not yet offer shareholders a dividend, as the company is fully in growth mode.
SHOP is down sharply in September, with the stock's month-to-date slide now exceeding 21%. For the full calendar year 2023 so far, though, SHOP is still beating the market with a 50% gain.
Shopify's latest results for the second quarter were impressive, as revenues came in at $1.69 billion, up 31% from the year-ago period. EPS of $0.14 compared favorably to a loss per share of $0.03 in the previous year. In fact, Shopify's earnings have surpassed Street expectations in four out of the past five quarters.
Key operating metrics relevant to a platform company such as Gross Merchandise Volume (up 17% YoY to $55 billion), Gross Payments Volume (up 27.3% YoY to $31.7 billion) and Monthly Recurring Revenue (up 30% YoY to $139 million) all grew from the previous year, pointing to the company's strong execution and operating capabilities.
Meanwhile, the company announced some developments on the AI front in its second quarter, with Shopify Magic and Sidekick designed in order to improve the merchants' ease of running their businesses.
However, the biggest recent development for Shopify has been its recent deal with Amazon (AMZN) to partner on its “Buy With Prime” program. Under the terms of the arrangement, the FAANG giant's “Buy with Prime” option will be added to Shopify Payments, enabling Shopify to continue generating processing fees. Further, the deal also entails an arrangement where Amazon is required to offer “Buy with Prime” to merchants through the Shopify App Store. This will allow Shopify to earn commissions along with the processing fees.
Analysts are projecting Shopify to report massive earnings growth of 200% in the next quarter, and 63.2% in FY 2023.
Overall, analysts remain optimistic on Shopify stock, handing out a “Moderate Buy” rating with a mean target price of $68.74. This indicates upside potential of 33% from current levels. Out of 37 analysts covering the stock, 15 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 20 have a “Hold” rating, and 1 has a “Strong Sell” rating.
