Second-quarter 2021 earnings reports are rolling in — the first full quarter in which early pandemic results from 2020 are being lapped — and the numbers look exceptionally good. Top growth stocks didn’t just get a one-time bump from COVID-19 and the rapid migration to digital transformation it set off. Many of these companies are still putting up impressive results even as they go up against tough comparable figures from last spring that were boosted from increased consumer and business activity while at home.
With this in mind, PayPal (NASDAQ:PYPL), Amazon (NASDAQ:AMZN), and Lam Research (NASDAQ:LRCX) look like great buys after a muted response from many investors following Q2 updates. Here’s why three Fool.com contributors think so.
Next gen financial services aren’t going anywhere
Nicholas Rossolillo (PayPal): After an epic run in 2020, pressure has been mounting for companies like PayPal (and its subsidiary Venmo) to prove the boom in business they got during economic lockdowns last year was more than a fleeting fad. While the response to Q2 earnings was ho-hum, PayPal went a long way toward proving its digital financial services are here to stay.
Specifically, PayPal’s Q2 revenue was in line with management’s guidance a few months ago, up 19% year over year to $6.24 billion. And though a record number of new account users signed up last spring, PayPal has become an incredibly sticky service that’s still busy acquiring new customers. Net new account additions totaled 11.4 million the last three months alone, and total payment volume processed on the network was up 40% to $311 billion.
PayPal is hard at work getting ready to start unveiling its new super app, complete with digital payments, cryptocurrencies, shopping tools, messaging, and more. This will be a herculean effort for the fintech giant, and spending to get the application up and running weighed on profitability this past quarter. Nevertheless, it promises to be a big payoff in the years to come as PayPal and Venmo look to consolidate a myriad of modern banking and financial services down to a single mobile app available from anywhere.
In spite of the work involved behind the scenes, PayPal still expects adjusted earnings per share to finish 2021 up roughly 21% from last year. After the post-Q2 earnings stumble, shares trade for about 58 times expected adjusted earnings — a premium price, unless of course you’re eyeing the ultra long-term potential that lies ahead for the company. This is a top fintech stock poised to continue steadily growing at a brisk pace for many years. I remain a buyer.
Amazon’s amazing mishap
Anders Bylund (Amazon): Mr. Market took one look at Amazon’s second-quarter report and dropped the share price by more than 7%. Earnings of $15.12 per share crushed the analyst consensus at $12.22 per share but revenue of $113 billion came in 1.7% below the Street target. That’s a mixed report with year-over-year sales growth of 27%, far below the 43% jump seen in April’s first-quarter update.
I understand why many investors are uncomfortable with Amazon’s results. Slower top-line growth is a scary concept for dyed-in-the-wool growth gurus, and Amazon is operating under new leadership for the first time ever.
At the same time, I’m licking my lips over the opportunity to buy more Amazon shares at a significant discount today. The online retail business looks soft in the harsh light of comparisons against the peak of 2020’s stay-at-home pandemic period. Meanwhile, sales surged 37% higher in the more lucrative Amazon Web Services (AWS) division. The “other” segment, where you find Amazon’s digital advertising services, reported a year-over-year revenue boost of 87%. Amazon’s business structure is changing, but that’s not a bad thing. The whole package is becoming more profitable over time.
Replacing Jeff Bezos with Andy Jassy in the CEO office doesn’t worry me, either. Jassy comes from the AWS side of Amazon’s sprawling business empire, which should only sharpen the company’s focus on high-margin digital services.
So Amazon’s mixed report doesn’t concern me at all. This is still a high-octane growth stock with a $1.7 trillion market cap, and starting a brand new Amazon position today will set you up for decades of market-beating gains.
Post-earnings sell-off gives investors an opportunity to add this top semi stock
Billy Duberstein (Lam Research): I know I’ve written about Lam Research a few times in recent months, but with the stock selling off after an otherwise stellar earnings report, now could be a good time to add to this top semiconductor equipment stock to your portfolio.
Revenue surged 48.5%, and GAAP EPS grew an even higher 68.7% relative to a year ago. Both metrics handily beat analyst estimates. It’s no secret that the pandemic has accelerated demand for digital solutions, and therefore the semiconductors that power those applications. That has led to a big shortage of chips — a shortage that could continue through this year and into 2022, and potentially longer, according to leading industry executives.
So why the sell-off? It’s a good question. Part of it could be the company’s guidance for the current quarter. Management projected sequential growth, but perhaps not as high as some may have anticipated. At the midpoint of guidance, revenue is set to grow 3.7% with earnings per share about flat. The semiconductor equipment sector has been cyclical in the past, so those looking at the midpoint of guidance may believe this is as good as things are going to get.
However, I wouldn’t be too worried. Lam has historically been a serial “under-promiser, over-deliverer” in the past, almost always beating guidance. And management said it had good visibility into the rest of the year and into 2022. CEO Tim Archer elaborated:
We remain confident in the health and sustainability of the industry at these levels. Wafer fab equipment spending as a percentage of semiconductor industry operating profit remains within historical ranges, and semiconductors continue to enable critical technology transformations such as AI, 5G, high-performance computing and IoT.
More granularly, DRAM memory spending, though a low percentage of revenue, is set to grow strongly in the second half and next year. And with all of the big, multi-year capital expenditure plans announced by the world’s leading foundries, logic spending should grow as well. NAND flash, which is Lam’s largest business, should remain about as strong in the second half as the first half.
Of course, all of this quarter-by-quarter hand-wringing can obscure the big picture: Lam is one of only a few equipment providers to the industry, and this oligopoly has high barriers to entry, which ensures really strong profitability and returns on invested capital.
Not only that, but even relative to its peers, Lam has been taking market share in recent years. Its advanced etch and deposition machines are especially important at the most advanced, leading-edge nodes that involve 3D stacking. Even through cycles, companies tend to progress to the next node every year to keep up their competitiveness, so Lam would likely grow even if the overall industry were flat. But while fluctuations occur year-to-year and quarter-to-quarter in this industry, semiconductor production and capital intensity is near-certain to grow handily over the course of the next decade.
Despite a strong run and terrific prospects, Lam still trades under 20 times the upcoming year’s earnings estimates, and it pays a growing dividend. At this valuation, the post-earnings sell-off could be a good opportunity to pick up some shares.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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