The stock market has done incredibly well in 2024 and the S&P 500 is up 25% year to date. Luckily for investors looking to put capital into the market, things have cooled down in December, with the S&P down 1% since the start of the month. Looking even deeper, some companies face challenges that have pulled down their stock prices.
Hoping for a discount in the share price is only part of the equation for finding the best stocks to buy. Investors should also be searching for companies with competitive advantages and solid track records of success. Short-term challenges have created opportunities to buy shares in these two companies at a discount.
For investors with $1,000 to put to work in the market, buying one or both of these stocks could end up being a wise decision.
Adobe
If you’ve opened a PDF file, you’ve used an Adobe (ADBE -0.25%) product. While this ubiquitous file type may be Adobe’s most well-known application, it’s the company’s creative suite that is the primary driver of the financial results. Products like Photoshop and Premiere Pro are industry standards for creative fields, even as competition has increased over time.
Proof of Adobe’s market position is evident in its financial results. Like all businesses, there are sometimes short-term bumps in the road, but over the long run, Adobe has been remarkably consistent. Consider revenue, net income, and free cash flow over the last five years.
ADBE Revenue (TTM) data by YCharts
While Adobe’s track record is impressive, investing is about the future and the biggest potential disruption to Adobe’s market dominance is artificial intelligence (AI). Many of the tasks creators would do within Adobe’s products can already be produced by AI, and the capabilities of AI are increasing every day.
Adobe has chosen to embrace this new technology and has been working hard to embed its AI product, Firefly, into its software suite. Rather than viewing AI as a replacement for Adobe’s products, the company believes it can be an assistant to the creative process by taking care of some of the more menial tasks, freeing up the creator to be creative.
Time will tell how successful this strategy will be, and the market seems to be waiting to find out. Adobe currently trades for a price-to-earnings (P/E) ratio of 36. While that’s not a cheap multiple, it is below Adobe’s five-year mean P/E ratio of 47. For investors who believe Adobe will be able to harness the power of AI, rather than be disrupted by it, today’s price could prove to be a bargain.
ASML
Much like Adobe, Dutch manufacturer ASML (ASML -0.44%) is the leader in its industry. ASML manufactures the lithography machines necessary to make all semiconductor chips. When it comes to the most advanced semiconductors, ASML is the only company in the world that makes the extreme ultraviolet lithography (EUV) machines necessary for those cutting-edge chips.
With that kind of competitive advantage, one would expect ASML to trade for a very rich valuation, and that’s usually the case. However, the semiconductor industry’s cyclical downtown (AI chips notwithstanding) combined with the geopolitical restrictions on where advanced semiconductors can be sold have cast more uncertainty over the business than is typical. This has led to ASML trading for almost the same discount to its five-year mean P/E ratio as Adobe.
ASML PE Ratio data by YCharts
ASML’s management believes the challenges it is facing will last into 2025 before any recovery is seen. While that could mean further stock dips, ASML’s discount right now presents a compelling buying opportunity for a company that will be at the center of one of the most important industries for years to come.
ASML expects overall semiconductor sales to grow at a 9% compound annual growth rate between 2025 and 2030, providing some insight into the demand that is waiting on the other side of this cyclical downturn. Perhaps more importantly, the company believes that semiconductor sales for servers, data centers, and storage will be twice that of overall sales.
This should mean there will be continuing demand for ASML’s most advanced EUV machines, as this is where the AI spending should be concentrated.
Jeff Santoro has positions in ASML and Adobe. The Motley Fool has positions in and recommends ASML and Adobe. The Motley Fool has a disclosure policy.
