3 Top Tech Stocks to Buy for 2023 and Beyond

The bear market of 2022 was unkind to tech stocks, and semiconductor companies in particular took an extreme beating. Just as the global chip shortage was coming to an end, consumers started tapping the brakes on purchases of smartphones and PCs. Chip designers and manufacturers alike got clobbered.

But in recent months, semiconductor stocks have gotten hot again. The market is sniffing out the next up cycle, which could arrive in the second half of 2023. But besides a rebound, there’s a lot to like about top names in the semiconductor space. Three Fool.com contributors like Micron Technology (MU -0.54%), Applied Materials (AMAT -0.81%), and Microchip Technology (MCHP -0.90%) right now. Here’s why they could be great investments for 2023 and beyond.

Memory market rebound: Don’t miss Micron Technology’s next cyclical upswing

Anders Bylund (Micron Technology): The memory chip market has been a tough place to do business in recent months. An industrywide lack of supply for other types of semiconductors put a hard cap on production volumes in many key sectors. From cars and smartphones to medical devices and data center servers, the available supply of DRAM (operating memory) and NAND (long-term storage) modules far outstripped the device makers’ demand for those chips. The giants of this industry run their own production lines, which separates the memory chip supply chain from the increasingly centralized pipelines of most other semiconductor types.

So warehouses swelled with unsold DRAM and NAND semiconductors, driving unit prices way down. These price drops tend to come along every few years in this sector. The main culprit is usually industry-leading producer Samsung cranking up its factory output and flooding the market, but the current downturn is different. This time, chip prices were slashed by the aftershocks of a global pandemic.

Either way, the combination of slow sales and low unit prices is weighing heavily on Micron Technology’s financial results and stock price. The pure-play memory chip expert’s trailing sales are down by 29% in a year and free cash flows are printed in deeply red ink. As a result, the stock trades 37% below the all-time highs of January 2022.

And the stars are aligning for another sharp upswing.

Samsung can bring this industry down with ill-timed production jumps, but the opposite effect is also possible. In this case, the Korean technology giant announced memory-chip production cuts earlier this month — and that’s great news for fellow memory-chip makers such as Micron. Of course, Micron is doing its part to support higher prices, having lowered its production volumes earlier this year.

On top of that, the global chipmaking shortage is finally ending. Car production is rising again. Smartphone makers are cranking up their volume gently while including more memory in each handset. And in the data center, soaring demand for artificial intelligence (AI) tools and services should result in much larger memory banks per server — efficient AI processes consume a lot of memory space.

So Micron’s highly cyclical stock chart is poised for the next majestic upswing. It’s still early and share prices are still low, so the buying window for Micron stock stands wide open.

The broadest portfolio of chip equipment doles out the cash

Nicholas Rossolillo (Applied Materials): Even as the chip downturn starts to show signs of easing up, semiconductor manufacturers are being cautious and scaling back their spending on expensive equipment. Such is normal when there’s a threat of recession. As a result, 2023 is likely to be an off year for the semiconductor fab equipment specialists of the chip industry. 

In spite of this, Applied Materials — which has the broadest portfolio of chipmaking equipment around — is anticipating it will outperform most of its peers. In fact, for the second quarter of fiscal 2023 (the three-month period that will conclude at the end of April 2023), Applied’s management forecast revenue and adjusted earnings per share (EPS) could be up as much as 9% year over year. While that isn’t blistering growth, it’s not bad for a year like 2023 with recession worries at the top of many businesses’ minds.

Longer-term, Applied could continue grow as semiconductors keep proliferating across the global economy. This leader in chipmaking equipment also has a long history of rewarding shareholders with cash dividends and stock repurchases. And it looks dedicated to continuing that practice. In March, the quarterly dividend was increased 23% (making for an annual yield of 1.2%), and the stock repurchase program was replenished with another $10 billion commitment — to be executed gradually over time.

For the record, $10 billion is currently worth over 10% of Applied Materials’ market cap of $98 billion. It’s a generous return of cash to shareholders.

The stock currently trades for less than 16 times trailing-12-month earnings per share, or about 25 times trailing-12-month free cash flow. This is one of the top tech stocks I’ve been buying so far in 2023, and I plan on buying some more.

This chip stock is growing like gangbusters through this downturn

Billy Duberstein (Microchip Technology): Microchip Technology isn’t a name that comes up often in conversations about glitzy topics like AI or electric vehicles, but the company just continues to execute.

Microchip is a designer of microcontrollers, microprocessors, digital and mixed-signal chips, analog chips, and field programmable gate arrays, mostly for industrial, auto, and data center applications. The company has delivered stellar results over the past year, benefiting from increased automation and electrification across the economy.

While consumer electronics are in a severe downturn, auto and industrial chips have remained in high demand over the past year, and Microchip has continued to post strong results. Its December quarter revenue was up 23.4%. Not only that, but management guided for 2.5% sequential growth in March, and similar sequential growth in the June quarter. Given the extreme declines in PCs and smartphones these days, that resilience speaks to the strength of Microchip’s end markets and product portfolio. Over the long term, Microchip believes it can grow at a 10% to 15% annualized growth rate, benefiting from secular megatrends.

Microchip also generates high profit margins, with a long-term model of 44% to 46% operating margin. And it’s returning more and more of that profitability to shareholders every quarter, as the company is fast approaching its target leverage ratio of 1.5 times debt to EBITDA.

That milestone is actually a big deal, as it has been nearly five years in the making. Since 2018, Microchip has worked down the acquisition debt it took on to buy Microsemi for $10.3 billion that year. Since that time, Microchip has steadily paid down $6.2 billion of that debt.

So while Microchip has devoted most of its cash flow to paying down debt over the last five years, management plans to return 100% of free cash to shareholders after its debt target is reached. So Microchip’s 1.77% dividend yield should grow handily in the future, with more share repurchases as well.

Wall Street projects $6.21 in 2024 EPS for the year ending March of 2024, meaning Microchip shares trade at just 12.8 times forward earnings. That seems like a bargain price, given the strength of Microchip’s business, end markets, and increasing shareholder returns.

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