At the time of this writing, the S&P500 and Nasdaq Compound the indexes are down 10% and 17% respectively so far in 2022. The global economy is slowing and some economists (and very vocal market pundits) still think a recession is possible this year or next. And yet, stocks have rallied sharply from their mid-June lows.
Has a new bull market started or will the recession drag stocks down? It’s hard to say. Either way, though, focusing on quality companies that can grow despite macroeconomic issues is the way to go if you’re a long-term investor. Three Fool.com contributors think Alphabet (GOOGL -2.46%) (GOOG -2.27%), LiveRamp Holdings (RAMP -1.71%)and Marvell Technology Group (MRVL -2.58%) will thrive no matter what happens next. Here’s why.
This perpetual cash generator is being pushed by its CEO to get even better
Billy Duberstein (Alphabet): Not sure about the evolution of the economy? Now is the time to invest in companies with both offensive and defensive qualities. And I can think of no better example than Alphabet, Google’s parent company.
On defense, Alphabet has three key attributes. First, Alphabet’s core search business is an effective monopoly on global search, with more than 91% market share last month.
Not only does Alphabet have a virtual monopoly on search, but search itself is quite a defensive activity, given that it doesn’t require as much third-party data to effectively target ads. This contrasts with social media platforms, which were affected by last year’s IDFA privacy regulations that limited their targeting capabilities. In a tough advertising environment, Google search still grew 13.5% year-over-year last quarter, much better than social media rivals, all of which struggled. When potential customers enter their search terms, they often have strong intentions to purchase a product. For this reason, search ads are likely one of the last things advertisers would cut during a drop in ad spend.
Another defensive quality is Alphabet’s balance sheet, which has $125 billion in cash at the end of the second quarter, with just $14.7 billion in long-term debt. Alphabet has ramped up its buybacks in recent years, so if its stock price drops or stays at these lower levels, management can take out significantly more shares without sacrificing growth opportunities. The company currently has a $70 billion buyback program underway, which could take out 4.5% of Alphabet’s stock at current market capitalization.
Third, Alphabet is a rising player in cloud computing. A late start with the third-highest market share, Alphabet’s Google Cloud Platform has consistently performed well, up 35.6% last quarter to a $19 billion run rate. Since enterprise customers typically save money and gain flexibility when moving to the cloud, the cloud computing industry is expected to remain relatively resilient overall, even in the face of a downturn in the economy.
On the offensive side, if the economy improves, advertising budgets will increase. This will not only benefit search advertising, but also Google’s ad networks and YouTube, which has seen its audience grow but has seen its growth take a hit amid the recent advertising downturn. Alphabet also has significant investments in artificial intelligence (AI) and new-era lunar “other bets” projects that could see more adoption if economic conditions improve. These include companies in health data, fiber broadband and self-driving car company Waymo, among others.
Given the softer macro backdrop, CEO Sundar Pichai recently emailed the entire company saying, “We need to be more enterprising, work with greater urgency, sharper focus and more hungry than we showed on the sunnier days”.
So while Alphabet remains highly profitable and has weathered the current environment much better than others, Pichai is still pushing employees to do more with less. That should make Alphabet a defensive play that could surprise on the upside.
LiveRamp deserves a much richer price tag
Anders Bylund (LiveRamp): LiveRamp Holdings, experts in data management and analysis, offers a rare combination of robust growth and advantageous stock prices.
The company has strong ties to the digital advertising market, where other companies rely on its privacy-enhanced data collection and analysis tools to create and support their online marketing campaigns. LiveRamp’s closest rivals tend to trade at exorbitant valuations, often north of 20x trailing sales. But that stock was thrown out with the market bathwater, changing hands at just 2.7 times sales today.
At the same time, LiveRamp has more than doubled its sales in four years. Data-driven advertising is a hot topic and this company is a veteran in this field. As a result, the company smashed Wall Street estimates across the board in the recently released first quarter of fiscal 2023. Still, the stock continues to set new multi-year lows, plunging to prices not seen since 2018.
LiveRamp’s high-margin Software-as-a-Service (SaaS) platform generates strong cash benefits. The company reported free cash flow of $56 million in the past four quarters, based on $552 million in revenue. LiveRamp’s balance sheet contains $508 million in cash equivalents and no long-term debt. Additionally, LiveRamp’s privacy-friendly data analytics platform is not easily replaced, which makes its customers very loyal.
In short, LiveRamp stock deserves the same double-digit price-to-sales ratios as the SaaS giants. Snowflake and The trading post, who are also close partners of LiveRamp. Net dollar retention rates reached 113% in the first quarter, for example.
This title is ready for a tremendous rebound. If there were another recession in the charts, it would only delay LiveRamp’s return to reasonable valuation. It looks like a lucrative trip if you buy stocks at these bargain prices.
The new kid on the data center block
Nicholas Rossolillo (Marvell Technology Group): Everyone knows the big names in semiconductors like Nvidia and Advanced micro-systems are currently benefiting from a rapidly changing data center industry. But there are other chip companies that are profiting massively from data center construction, AI, and related technology movements. If you haven’t heard of it yet, let me introduce you to Marvell Technology Group.
Marvell has been around since the mid-1990s, designing chips for network infrastructure. Its data processing units (DPUs) are at the heart of its semiconductor portfolio. These DPUs are specialized circuits responsible for moving and processing huge amounts of data in a data center. Nvidia called the DPU “the third pillar of the computing world” along with central processing units (CPUs) and graphics processing units (GPUs).
Over the years, Marvell has steadily acquired smaller peers to expand into adjacent network hardware like data center switches, data storage controllers and Ethernet products. As a result, Marvell is now a leader in networking hardware for applications ranging from AI to cybersecurity to automotive computing. In fact, even though consumer electronics spending is poised for a cyclical downturn in the second half of 2022, data centers and adjacent markets like 5G network infrastructure are still booming. Most of Marvell’s revenue comes from these sources, not consumer products, so it’s likely to remain in growth mode.
For reference, Marvell reported sales of $1.45 billion in the first quarter of fiscal 2023, ending April 30, and forecasts a very good sequential increase in sales for the second quarter ($1.515 billion at mid-term). journey). Management will report on the second quarter on August 25. Ahead of the quarterly report, Marvell shares are trading at 41 times company value for earnings before interest, taxes, depreciation and amortization (EBITDA). It’s a high price, but one that’s getting better quickly as Marvell digests the effects of a few acquisitions in 2021. I’m a buyer right now.