Focus on quality in this market: Steady growth, profitability, and ample cash.

In this market where fear rules, nearly all stocks are punished. With inflation sky high and the Federal Reserve tightening monetary policy in response, 2022 is sure to be one of the more volatile years for the stock market in at least the last decade. Investors should focus on companies that can easily withstand turbulence — companies that generate lots of cash.

Three Motley contributors think Alphabet ( GOOGL 4.20%)( GOOG 4.16%), Universal Display ( OLED 4.11%), and Kulicke and Soffa Industries ( KLIC 3.25%) are cash cows ideally positioned to thrive. Here’s why they think each is a buy right now. Image source: Getty Images. The “Snap” that broke the camel’s back?

Nicholas Rossolillo (Alphabet): Pretty much every business that is involved with digital advertising has been thrown into (more) turmoil in the last week. Turns out investors can add Snap ( SNAP 5.20%) — as in social media company Snapchat — to the list of worries that already include inflation, war, and possible global economic recession. Snap, which makes money off of ads, walked back its revenue and profit guidance provided just a month ago, citing worsening macroeconomic conditions. A debate was sparked as to whether this was just a Snap problem or an indication of wider industry slowdown.

Google parent Alphabet wasn’t immune to the pain. Mr. Market decided the only internet search provider investors care about is going to get hit by the same economic factors as Snap. Color me skeptical.

Sure, I wouldn’t be surprised if Alphabet records a slower growth rate for the rest of the year than it did in the first quarter of 2022. For the record, revenue expanded at a 23% year-over-year pace in Q1. But with shares trading for 20 times trailing-12-month earnings (or 22 times trailing-12-month free cash flow ) and just under 17 times one-year forward price-to-earnings, expectations for a slowdown look priced into the stock at this point.

And even if Google’s ad and internet empire lose some steam, this is no Snap. Alphabet reported total operating income of $20.1 billion in the first quarter of 2022, an operating margin of nearly 30%. Free cash flow was $15.3 billion. Talk about a cash cow. Snap, by contrast, reported free cash flow of $106 million on revenue of $1.06 billion in Q1 — basically, an amount that could be an easy rounding error when calculating Alphabet’s results.

Add in a balance sheet featuring some $120 billion in cash and equivalents and you start to get the idea. A cyclical slowdown in digital advertising, if that is indeed what’s in store later this year, is going to hit harder for just about everyone else in the digital ad industry than it is for Google.

Even more important than the cash itself is what Alphabet is deciding to do with the cash. It used $11.4 billion in share repurchases in Q1 alone, a huge return to shareholders that is further boosting the value of this money machine. Alphabet stock is now down 30% from all-time highs as of this writing. I struggle to see how this stock doesn’t make investors money five years from now, so I’m blocking out the naysaying and will be buying more. Small cash machines can also be extremely effective

Anders Bylund (Universal Display): Organic light-emitting diode (OLED) screens are showing up everywhere, from mid-range smartphones to top-shelf TV sets. Everybody knows that OLED researcher and materials reseller Universal Display is a high-octane growth stock as the technology is taking the world by storm. That’s certainly true, as Universal Display has doubled its sales in five years.

But did you know that Universal Display also runs a highly efficient cash machine?

Yep, that’s also true. The company pocketed $170 million of free cash flows over the last four quarters based on top-line sales of $570 million. That works out to a cash-based profit margin of 29.8%. To put that metric into context, let’s compare it to one of Universal Display’s most important customers: iPhone maker Apple ( AAPL 4.08%) generated $84.4 billion of free cash flow and $386 billion in revenue over the same period. Hence, Cupertino’s free cash margin stopped at 21.9%.

Furthermore, Universal Display’s balance sheet is clean as a whistle. The company has $727 million of cash equivalents available and no long-term debt at all. It’s not exactly fair to compare these figures to Apple’s much larger organization, but let me just point out that the iPhone maker […]

source 3 Cash Cow Tech Stocks to Buy Now

editor Stocks , , ,

Leave a Reply