Once upon a time, if investors were looking for excellent tech stocks to buy, they would consider the companies with the best growth stories, regardless of profitability.
That’s no longer the case in 2022. Investors want quality revenues and profits. Having one without the other is unacceptable these days.
Australian Financial Review recently discussed the tech split between “earners and burners.”
“The narrative is split into earners and burners,” Discovery Funds Management founder and portfolio manager Chris Bainbridge told AFR. “We believe this correction is one of the best things that could have happened for a number of tech companies because it enforces a financial discipline that hasn’t been there for the last few years.”
The portfolio manager believes today’s market is the perfect time for stock pickers. Buying the index no longer works.
So, what might?
An excellent place to start would be the income statement, balance sheet, and cash flow statement. If all three of these look positive and the valuations aren’t too high, you might have something.
For this article, I’ll use three criteria: Operating profits, low net debt, and free cash flow (FCF), to find seven tech stocks to buy with superior fundamentals.
|JKHY||Jack Henry & Associates||$194.41|
Microsoft (NASDAQ:MSFT) is one of those investments that’s hard to find fault with.
After all, it’s got one of the tech industry’s finest CEOs in Satya Nadella, who Barron’s recently named to its Best CEOs of 2022 list. Since Nadella became CEO in 2014, MSFT stock has generated an annualized total return of 27.9%, 2.5x greater than the S&P 500.
“Nadella’s prescient bet on cloud computing has also been a great success. Microsoft is now the solid No. 2 player in a market that Wedbush Securities predicts will reach $1 trillion over the next decade. According to Gartner, Microsoft’s Azure gained ground last year on the leader, Amazon Web Services, garnering a 21% share of the cloud market,” Barron’s contributor Tae Kim stated.
As for its financial statements, it finished fiscal 2022 (June year-end) with $57.73 billion in net cash, $83.38 billion in operating profits, and $65.15 billion in FCF.
Despite being one of the best tech stocks to buy and own for the long haul, its FCF yield is a reasonable 3.4%.
It’s a must-own.
In August, Paychex (NASDAQ:PAYX) CEO Martin Mucci announced his retirement as the human capital management company’s chief executive after 12 years in the top job. When Mucci became CEO, PAYX stock traded at around $28. It’s up 333% since, compared to 240% for the S&P 500.
“In his time as CEO, Paychex revenue has more than doubled, from $2 billion to over $4.6 billion, and our market capitalization has increased from $10 billion to nearly $50 billion,” Paychex founder and board member B. Thomas Golisano said.
Mucci will be replaced by Chief Operating Officer B. Thomas Gibson. Mucci will stay on as Chairman.
Paychex reported its Q4 2022 (May year-end) results at the end of June. It finished the fiscal year with operating profits of $1.84 billion (26% higher than 2021), $493.6 million in net cash, and $1.37 billion in FCF.
Its FCF yield is a reasonable 3.1%.
Lam Research (LRCX)
Lam Research (NASDAQ:LRCX) is a California-based semiconductor wafer fabrication equipment manufacturer.
It reported record revenues and earnings during the fourth quarter that ended June 26. On the top line, it had revenue of $4.64 billion, 14% higher than Q3 2022. On the bottom line, it had non-GAAP earnings per share of $8.83, 19% higher than the previous quarter.
“Lam delivered record levels of revenue and earnings per share in the June quarter while continuing to operate in a supply-constrained environment,” said Tim Archer, Lam Research’s President, and Chief Executive Officer.
Lam’s cash, cash equivalents, and short-term investments were $3.9 billion as of June 26, down from $4.6 billion at the end of March. The good news if you’re a shareholder is that it was lower due to $876.1 million in share repurchases. It finished fiscal 2022 with $1.06 billion in net debt.
The equipment manufacturer’s operating income in fiscal 2022 was $5.38 billion, 23% higher than a year earlier. Operating income accounted for 31.2% of revenue, 60 basis points higher than in 2021.
Its FCF yield is 4.4% based on the 2022 FCF of $2.55 billion and a $58.48 billion market cap. I believe that anything between 4% and 8% is fair value.
Cisco Systems (CSCO)
Cisco Systems (NASDAQ:CSCO) delivered better-than-expected Q4 2022 results in August. On the top line, its revenues were $13.1 billion, $310 million higher than analyst expectations. On the bottom line, it earned 83 cents per share, one cent better than the consensus estimate.
Equally important, the company’s guidance for fiscal 2023 was very optimistic. It expects revenues to grow by 5% at the midpoint, with EPS between $3.49 and $3.56. Analysts were expecting revenue growth of just 2.3% with $3.53 a share in earnings.
For fiscal 2022, its operating profit of $13.97 billion was 8.9% higher than $12.83 billion a year earlier. Its net cash was $10.6 billion, and its FCF yield was 7.3%. I consider anything over 8% to be in value territory.
Cisco finished the year with Remaining Performance obligations of more than $31 billion. It continues to transform its business into a more cloud-based operation. As a result, its Annualized Recurring Revenue (ARR) hit $22.9 billion at the end of the fourth quarter, 8% higher than a year ago.
Between share repurchases and dividends, Cisco returns more than $4 billion a quarter to shareholders.
The average analyst rating from the 11 analysts covering Synaptics (NASDAQ:SYNA) is a “buy” with a target price of $190.50, that’s 73% higher than its current share price.
The producer of high-performance Internet of Things (IoT) semiconductor solutions generates approximately 70% of revenue from IoT products and services. The remaining 30% is from Mobile and PC end markets. In fiscal 2018, Mobile and PC end markets accounted for 79% of its revenue. In 2019, its serviceable available market (SAM) was $8 billion. Thanks to IoT, it’s grown to more than $11 billion in 2023.
In recent years, Synaptics has done an excellent job strengthening its financial performance — its non-generally accepted accounting principles (GAAP) gross margin in Q4 2022 was 61.0%, 20.9 percentage points higher than Q4 2019, while its Q4 2022 non-GAAP operating margin was 39%, almost 8x what it was in Q4 2019 — and that’s led to a much healthier balance sheet.
At the end of June, Synaptics had net debt of $105.7 million. In comparison, at the end of fiscal 2019, it had $140.5 million in net debt. Simultaneously, its total assets over the past three years have grown by 103% to $2.86 billion from $1.41 billion.
In terms of valuation, its free cash flow yield is 9.1%, putting it squarely in value territory. Definitely, one of the best tech stocks to buy right now.
Jack Henry & Associates (JKHY)
Although Jack Henry & Associates (NASDAQ:JKHY) sounds like the name of a law firm somewhere, it’s a provider of financial technology solutions for small- and mid-sized banks. It currently serves more than 8,000 clients.
On Sept. 1, Jack Henry completed its latest acquisition, buying Payrailz, an artificial intelligence-focused provider of bill payment and peer-to-peer payments. While no terms were released, the deal enables Jack Henry to up its payments-as-a-service (PaaS) game with banks and credit unions. Adding just $8 to $10 million in revenue, it’s a strategic acquisition. It won’t move the needle in the near term.
On the same day, it closed its acquisition of Payrailz; it also announced it was teaming up with Google Cloud to accelerate its next-generation technology strategy.
“Through its work with Google Cloud, Jack Henry will keep financial institutions at the center of their accountholders’ financial lives by enabling access to a broad ecosystem of Jack Henry solutions and leading fintechs through a single, secure, and scalable cloud-first platform,” its Sept. 1 press release stated.
On the financial front, Jack Henry’s revenues increased 9% in fiscal 2022, while its operating income jumped 13% over 2021. In 2023, it expects to generate at least $2.05 billion in revenue with $5.05 a share in earnings.
Lumentum Holdings (LITE)
Lumentum Holdings (NASDAQ:LITE) reported Q4 2022 results on Aug. 16. Both its revenues and earnings topped analyst estimates — revenue was $422.1 million, $4.1 million higher than the consensus, while it earned 49 cents in the quarter, 21 cents better than analyst expectations — but its guidance for Q1 2023 was below estimates.
“In fiscal 2022, we achieved record revenue in datacom EMLs, coherent components, pump lasers, tunable products, and sub-sea components, with company profitability above our target model of 50 percent gross margin and 30 percent operating margin,” said Alan Lowe, President and CEO.
LITE stock has lost 18% of its value in the three weeks since announcing earnings. It’s down almost 27% year-to-date.
Despite the downbeat outlook for the first quarter, analysts mostly like the maker of optical and photonics products’ stock. A total of 14 analysts cover Lumentum. Eleven rates it a “buy,” two have it “overweight,” with one “hold,” and no sells. The average target price is $111.62, 42% higher than its current share price.
As of July 2, it had $ 2.55 billion in cash and short-term investments and $1.88 billion in convertible notes for $670.0 million in net cash.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.