Many of the world’s biggest and most dominant companies are being sold off relentlessly. Given the current worries of a recession amid a rising interest rate environment, some of these fears are warranted. However, the market has outdone itself and has presented several fantastic values to investors, most notably in the big tech space.
Three stocks I’ve got my eye on are Nvidia (NVDA -6.82%), Alphabet (GOOG -3.69%), and Amazon (AMZN -7.16%). As of May 13, they are down 22% (Alphabet), 40% (Amazon), and 47% (Nvidia) from their all-time highs. While each of these stocks represents tremendous value, which is the best buy now?
Each company is massive and has many endeavors it is undertaking. However, each has a specific niche that got it to the top.
Nvidia makes the world’s best GPUs (graphics processing units) used in gaming computers, data centers, and self-driving cars. It is also getting further into the software space with self-driving car software and the omniverse (Nvidia’s metaverse).
Alphabet derives most of its revenue from advertisements on its YouTube platform and Google search engine. It also has a cloud computing business that competes with Amazon, but it is far behind Amazon Web Services (AWS) in terms of market share.
Finally, Amazon’s e-commerce business has changed the way consumers shop for goods. However, the actual investment value comes from AWS, its massive cloud computing platform.
All three businesses compete in huge markets that will be around for many years into the future. However, Amazon’s e-commerce business has struggled as of late, whereas the other two have had massive growth.
Winners: Nvidia and Alphabet
2021 was a solid year for all three businesses, but 2022 has introduced some problematic comparisons. Because Nvidia is on a different fiscal year (FY) schedule than Amazon and Alphabet, it has not delivered its FY 2023 first-quarter results (ending April 30), but it will report them on May 25.
Still, its last quarterly report was incredible. Nvidia’s FY fourth-quarter 2022 (ending Jan. 30, 2022) quarterly revenue rose 53% year over year (YoY) to $7.6 billion, and its net income increased 106% YoY to $3 billion for a net profit margin of 39.5%.
On the other end of the spectrum, Amazon’s Q1 results were lackluster. Net sales only rose 7% YoY, and Amazon reported a net loss of $3.8 billion, a -3.2% margin. However, when investors look into Amazon’s divisions, it reveals several noteworthy takeaways.
|Segment||YOY Revenue Growth||Operating Income Growth||Operating Income Margin|
|North America sales||8%||(145%)||(2.3%)|
First, Amazon overhired and overbuilt during the pandemic and is taking some losses now that e-commerce demand has slowed. Second, AWS is an absolute beast. While it doesn’t have the margin profile and isn’t growing as quickly as Nvidia, AWS would be a fantastic stand-alone company. However, Amazon’s e-commerce business is holding it back.
Alphabet’s results fall in the middle of these two — nothing spectacular, but solid. In Q1, Alphabet grew revenue by 23% YoY and maintained a 24% profit margin. It also announced a $70 billion stock buyback plan, which will reduce shares outstanding by about 4.5%, further boosting its earnings per share number by decreasing the ratio’s denominator.
In terms of financials, Nvidia gets the nod. Of course, this determination may change after Nvidia reports results, but with management guiding for 43% revenue growth in its FY 2023 Q1, I doubt Nvidia would lose its leadership position among its peers.
Comparing the valuation of these companies is difficult, as each is in a different stage of achieving maximum profitability. Amazon trades at a five-year low 2.4 price-to-sales (PS) ratio with a $1.14 trillion market cap. However, if you put a 15 times sales multiple (Nvidia trades for 16 times sales) on the AWS business, at a $67.1 billion trailing-12-month sales number, you get a $1 trillion market cap. That means Amazon’s entire e-commerce business would be worth about $100 billion — that’s dirt cheap.
Nvidia and Alphabet are easier to compare head-to-head, as they are both generating consistent net income.
Both companies have seen their valuations drop considerably, but Alphabet is trading for a bargain 21 times earnings. Nvidia is still expensive, but it has the growth to reduce its valuation if the stock price stays constant.
Overall, I think all three of these companies are great values in the market.
Tallying up the scores, Nvidia takes the prize as the best big-tech stock to buy right now. Of course, investors will need to see what management has to say during its FY 2023 Q1 report. Still, it’s unlikely that its business will be seriously impaired by the current conditions.
Nvidia may be my top pick, but Alphabet is also a great buy. I’m unsure about Amazon due to its e-commerce difficulties, but it could also recover. Either way, I would find it difficult to believe if any of these three stocks aren’t higher three to five years in the future, compared to today’s prices.