It’s been a turbulent start to the year for the major market averages, and tech has been hit the hardest, with the Nasdaq-100 (QQQ) down nearly 3% year-to-date. This can be attributed to some anxiety about rate hikes later this year, making it harder to justify the sky-high valuations in several sectors. However, while many investors are rushing to buy story stocks that had their IPO debuts last year, I believe that two names are sitting in plain sight with superior fundamentals and trading at very reasonable valuations. In this update, we’ll look at two buy-the-dip candidates:

(Source: TC2000.com)

Qualcomm (QCOM) and Amazon.com (AMZN) have little in common, with the latter being an online retail behemoth with a tech component due to Amazon Web Services, and the other being a Semiconductor stock, that is expected to see significant growth helped by the transition from 4G to 5G. However, two traits that each company shares are that they both have strong earnings growth on the horizon, and they trade at very reasonable valuations relative to historical multiples and factoring in their dominant position relative to peers. Let’s take a look at Qualcomm first:

Beginning with Qualcomm, the company’s product catalog includes processors, modems, RF systems, 5G, 4G, and legacy connectivity solutions. It’s most widely known for its cellular connectivity, with its technology powering the connection of smartphones and tablets globally. The most significant growth opportunity for the company is 5G, which is the 5th generation mobile network, which is expected to deliver higher multi-Gbps peak data speeds, ultra-low latency, more reliability, and a more uniform experience for all users.

Qualcomm’s X65 is the world’s first 10 Gigabit 5G and the first 3GPP modem-to-antenna solution, designed for rapid commercial extending 5G in mobile broadband, fixed wireless, IoT, and 5G private networks. This makes them well-positioned to benefit from the 5G rollout, while its other segments also enjoy strong growth, with 5G handset shipments expected to double from FY2021 levels.

During QCOM’s Q4 2021 results released in November, the company posted strong beats on both the top and bottom line, with revenue of $9.33BB, up 12% year-over-year, and quarterly earnings per share of $2.55, up 76% year-over-year. This robust report was driven by impressive growth in RF Front End (+ 76%), Automotive (+ 51%), and IoT (+ 67%).

The significant earnings growth was driven by significant margin expansion in QTC, with EBIT margins up from 17% in FY2020 to 29% in FY2021. As we can see, this margin expansion and steady revenue growth have completely turned around QCOM’s earnings trend, which was lifeless heading into FY2020, down more than 40% from FY2014 levels ($3.09 vs. $5.27).

(Source: YCharts.com, Author’s Chart)

Due to the strong Q4 results, QCOM grew annual EPS by 94% year-over-year, with annual EPS hitting a new all-time high. If we look ahead to FY2022, annual EPS is expected to increase another 30% to $11.12, with further growth to $12.35 in FY2023. This translates to a compound annual EPS growth rate of ~15.7% vs. FY2016 levels ($12.35 vs. $4.44), a massive acceleration from FY2020 when the compound annual EPS growth rate sat at an abhorrent figure of (-) 0.2%.

So, while QCOM may look expensive at ~17x FY2022 earnings estimates vs. a historical earnings multiple of 17, there’s no reason that the stock should trade at its historical multiple when it has a completely different growth profile currently. Instead, the stock could easily justify an earnings multiple of 22 or higher, and this would translate to a share price above $250.00 based on FY2023 estimates.

(Source: TC2000.com)

Notably, the technical picture has also never looked better, with QCOM breaking out of a massive base and building a base-on-base pattern, which typically leads continuation to the upside. It’s also worth noting that the stock did not give up any ground during the recent correction in the Nasdaq-100, suggesting it’s much stronger than the market and likely being accumulated. Given the improved fundamental outlook and the strong relative strength, I see QCOM as a Buy at $182.00 or lower.

The next name worth discussing is Amazon, which needs no introduction as it has steamrolled its competition and continues to post incredible performance. However, AMZN missed on its most recent results, with revenue coming in at $110.8BB, up just 15% year-over-year. Meanwhile, quarterly EPS came in at $6.12, down 51% year-over-year. This was a significant trend change from FY2020 levels and the slowest quarter for sales growth in over two years.

However, it’s important to note that AMZN was up against very difficult year-over-year comps, coming off a year when it increased annual EPS by 81%, an impressive feat for a mega-cap company. So, while FY2021 has been softer than the market was hoping, I don’t see any reason to turn luke-warm on the stock after a slight decline in annual EPS this year. This is especially true given that Amazon Web Services continues to grow like a weed, with multiple new commitments and migrations from customers across major industries, including manufacturing and hospitality.

(Source: YCharts.com, Author’s Chart)

Besides, if we look at the long-term picture, we can see that while annual EPS will decline in FY2021 ($40.90 vs. $41.83), it’s expected to nearly double looking out to FY2023, based on current estimates of $74.90. Therefore, the decline in earnings in FY2021 is merely an aberration in the long-term trend of earnings growth, like the down year in FY2017, which followed a year of triple-digit growth in FY2016. Importantly, due to the negativity related to the earnings miss, AMZN has become very reasonably valued and is now sitting near key support.

Over the past five years, AMZN has historically traded at ~79x earnings, but this was during a period of major growth. However, even if we use a more conservative earnings multiple of 55, AMZN still has meaningful upside. This is because the stock’s fair value would come in at $4,120 based on FY2023 estimates of $74.90, pointing to more than 25% upside from current levels. Meanwhile, from a technical standpoint, the stock has pulled back to a major trendline and its 100-week moving average, where it’s found support in the past.

(Source: TC2000.com)

AMZN is nowhere near a screaming buy at current levels, but it is reasonably valued, and it’s coming into an important support area. So, while I have no plans to add to my position yet, which I purchased in Q2 2020 at $1,950 per share, I would strongly consider adding to my position on a pullback below $3,100. This would bake in a more than 20% margin of safety to fair value and be an attractive entry point. Hence, the stock is worth keeping a close eye on if we see further weakness.

We’ve finally seen a minor correction in the market, but the market overall remains very expensive, with the S&P-500 trading at a price-to-sales ratio that dwarfs its peak revenue multiple at the 2000 peak. However, with QCOM and AMZN trading at reasonable valuations, these are two ways to gain exposure at a reasonable price. In summary, I see QCOM as a Buy below $182.00 and AMZN as a Buy below $3,110.

Disclosure: I am long QCOM, AMZN

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

AMZN shares were trading at $3,312.51 per share on Thursday morning, up $8.37 (+0.25%). Year-to-date, AMZN has declined -0.65%, versus a -0.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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