Applied Materials (NASDAQ: AMAT), Alteryx (NYSE: AYX), and Core Labs (NYSE: CLB) all have at least one thing in common: Each one was picked by a Motley Fool investor who thinks its stock can generate market-beating returns. In fact, our Fools are so confident in these companies, they'd assert that they have what it takes to outperform the likes of NVIDIA (NASDAQ: NVDA). That's a tall order: With NVIDIA's graphics processing units powering everything from artificial intelligence platforms to next-generation gaming consoles to cryptocurrency mining rigs, the tech company has in the past couple of years been one of the market's best performers.
In semiconductors, there's better fishing upstream
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Rich Smith (Applied Materials): I admit it: I'm a fan of NVIDIA. It's not often you find a company producing strong profits ($2.6 billion over the last 12 months), backing them up with even stronger free cash flow ($2.6 billion-plus), and also growing those profits rapidly, with Wall Street projecting better than 16% long-term annualized growth.
That being said, at a price-to-free-cash-flow ratio of nearly 50, I have to say I find NVIDIA's valuation somewhat less than attractive today. Mightn't it be better to invest in a stock with similarly strong quality of earnings, similar growth prospects -- but a less heady valuation?
I think it might be. And I think Applied Materials might be that better-priced stock.
Like NVIDIA, Applied Materials operates in the semiconductor sector, but as a maker of chip manufacturing equipment rather than as a manufacturer of chips per se. Like NVIDIA, it boasts strong earnings ($3.4 billion), strong free cash flow ($3.3 billion), and a strong 13% growth rate that some analysts predict could go as high as 30%.
What really sets Applied Materials' stock apart, though, is that at a market capitalization of just $50.8 billion, its valuation is less than half of NVIDIA's. For example, it sells for not 50 times free cash flow, but less than 15 times. With a similar growth rate and a higher dividend yield (0.8%, versus NVIDIA's measly 0.25%), Applied Materials seems like a much better value in my book.
Look outside technology for market-beating returns
Todd Campbell (Core Labs): NVIDIA is a top performer for good reason (hey, I own it), but investors might find that energy service stocks, including Core Labs, generate greater returns from here.
NVIDIA shares are flirting with new highs: The stock is trading at 15 times sales, and its P/E to growth (PEG) ratio is 4.2. That's a bit rich. Energy services stocks, however, are relative bargain-basement buys now because of the steep declines in crude oil prices since 2014.
Although Core Labs isn't the cheapest energy service stock, it's a top-shelf player that's trading at only 7 times sales and that has a PEG ratio of just 1.19. It provides oil and gas exploration and production companies with intelligence tools that boost well production and extend well life, and importantly, there's evidence that demand for its services is beginning to increase again.
Since OPEC extended its production cuts last year, the number of active oil and gas rigs has been expanding. That's boosting demand for Core Labs solutions. In the fourth quarter, its sales increased 14.9% year over year to $171.8 million, its operating margin swelled 4 percentage points to 19%, and its net income jumped 41% to $21.7 million. If these trends continue, I think Core Labs' performance could give NVIDIA a run for its money.
Data scientists rejoice!
Steve Symington (Alteryx): Alteryx isn't exactly a household name yet. But with over 3,000 customers including the likes of Microsoft, Coca-Cola, Johnson & Johnson, and Verizon, the data-analytics specialist won't be able to stay out of the spotlight forever.
Alteryx is already growing quickly thanks to the relative simplicity of its self-service data-analytics platform. Revenue last quarter soared 52% year over year to $34.2 million, and revenue this year is expected to arrive at roughly $129 million. Admittedly, Alteryx has yet to achieve sustained profitability, but it's relatively common for hungry young tech companies to forsake profits as they invest heavily to drive revenue growth and take market share.
Speaking of markets, Alteryx believes its total addressable market stands at around $28 billion -- a staggering estimate that could mean life-changing returns for shareholders if the company captures even a fraction of that total in the coming years. At the very least, considering that its share price has nearly doubled since shortly after its IPO last March, I think Alteryx is worth adding to your watch list -- either to wait on in hopes of the chance to take advantage of a pullback, or to buy soon and bet that this winner will keep on winning.
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Rich Smith has no position in any of the stocks mentioned. Steve Symington owns shares of Nvidia. Todd Campbell owns shares of Microsoft and Nvidia. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson, Nvidia, and Verizon Communications. The Motley Fool recommends Alteryx and Core Laboratories. The Motley Fool has a disclosure policy.