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As bad as the stock market is this year, cryptocurrencies have been worse. In fact, every asset class is doing better than crypto, and you can just about throw a dart at a list of stocks these days and do better than your favorite cryptocurrency token.
But that doesn’t mean stocks have a smooth ride ahead, as many believe we’re heading into a recession early next year. Growth stocks, which led the Nasdaq 100 on a 13-year-long bull market, have lost nearly 30% in 2022, and a potential sharp economic downturn doesn’t bode well for a reversal.
Some businesses, however, are resilient regardless, and buying them now may reward patient investors with substantial wealth over the long run. The following trio of stocks is an example of companies with far more potential than any cryptocurrency.
Image source: Getty Images.
Recession fears are hurting corporate spending. Cloud-based capital projects are slowing, hurting cloud and software-as-a-service (SaaS) stocks, generally, but cybersecurity-expert Zscaler (ZS -0.71%), in particular.
The company’s stock tumbled hard the other day after Zscaler reported fiscal first-quarter revenue, earnings, and billings that beat analyst expectations. That’s because it gave a forecast that, while still better than Wall Street forecasts, grew at a significantly lower rate than previously.
While there are spending headwinds, demand for Zscaler’s business remains robust. The company is seeing its sales cycle “elongating” — stretching out over wider periods — but only because the size of the deals it’s closing are getting bigger. That requires more time to scrutinize and review the contracts.
Zscaler ended the quarter with over 340 customers that have $1 million or more in annual recovering revenue with it — a 55% increase from last year. All of the company’s customers have been impacted by macroeconomic events, but the low end of its client base actually ended better off than the upper end. As a result, Zscaler sees more opportunities to help customers adopt more products, which will continue to increase its deal size.
Zscaler stock is down 57% over the past year, but with the market analysts at Gartner predicting global cybersecurity spending to hit $262 billion by 2026, there’s a substantial runway for future growth in this stock.
AT&T‘s (T 0.61%) narrow focus on its telecom operations to the exclusion of virtually anything else is paying off for investors. It continues to add more customers, while rivals like Verizon are shedding them as the rollout of 5G networks and fiber-optic wired broadband is providing the biggest catalyst for future growth.
The telecom giant is well on its way to achieving its goal of reaching over 30 million locations, including businesses, by the end of 2025 with its fiber network, and is doing so without being overly promotional. At a recent analyst conference, AT&T said that as of the end of the third quarter, it could serve 18.5 million consumer locations and approximately 3 million business locations in more than 100 metro areas.
COO Jeff McElfresh said AT&T refrained from being “aggressive” with deals on Black Friday to attract customers and has not “been the most aggressive in the market for quite some time.”
That bodes well for profitability and growing free cash flow (FCF), which the company maintains should hit $14 billion this year. That’s notable because AT&T’s stock is cheap. The telecom trades for seven times trailing earnings and next year’s estimates, 1.1 times sales, and a bargain-basement three times the FCF it produces.
The company is longer a Dividend Aristocrat after having slashed its payout in half following the spinoff and merger of its entertainment business into Warner Bros Discovery (WBD 3.48%). The dividend, however, still yields a lucrative 5.8% annually. The company’s payout ratio is just 41%, so the dividend is much safer now, with room for future growth.
Image source: Getty Images.
Taiwan Semiconductor (TSM 1.41%) is the world’s largest semiconductor foundry that manufactures integrated circuits based on designs provided by its clients. Despite the vaunted chip shortage that’s still impacting the industry today, Taiwan Semi has not felt the effects as much as its rivals because its customer base is some of the industry’s biggest tech companies, and its long-term demand remains “firmly in place.”
Demand is so strong, in fact, that the company began construction of a $12 billion 5-nanometer chip fabrication plant in Arizona last year and recently said it would be building a second factory in the Grand Canyon State. Due to many of its customers being U.S.-based businesses, these facilities should strengthen its ability to meet demand.
The long-term growth prospects for Taiwan Semiconductor attracted the attention of Warren Buffett, whose Berkshire Hathaway established a 60 million share, $4.8 billion stake in the chipmaker.
TSM is also offering a discount valuation, going for 13 times trailing and estimated earnings. At just 0.6 times its earnings growth rate, the semiconductor stock represents a better opportunity than any cryptocurrency.
Rich Duprey has positions in AT&T and Warner Bros. Discovery. The Motley Fool has positions in and recommends Berkshire Hathaway, Taiwan Semiconductor Manufacturing, and Zscaler. The Motley Fool recommends Verizon Communications and Warner Bros. Discovery and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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