The bad news? Tech stocks have been slammed recently. The good news? Tech stocks have been slammed recently—meaning if you’re a buyer, there are suddenly some opportunities. The great quest for investors is to find the technology up-and-comers that will be tomorrow’s stars.
Sure, the megaliths like Google parent Alphabet (GOOG) are very likely to recover and continue garnering oceans of earnings. Trouble is, these monster companies aren’t expected to give investors the exponential returns they did in earlier years. Alphabet is up 30-fold since the company’s 2004 initial public offering.
Picking the possible future winners, of course, isn’t easy. Tech companies are seemingly as numerous as the stars in the sky. Many are sure to fail. The swarm of early 20th-century U.S. automakers, such as Duesenberg and Studebaker, got whittled to a handful. MySpace looked like the dominant social media company until Facebook, now Meta Platforms (FB), came along. So how do you boost your odds of finding tomorrow’s victors?
The answer, according to numerous investment savants, is to be sure that a company has a good stock-market track record (with allowances for market-wide slumps like now), increasing revenue, improving cash flow, and most of all, competitive positioning. Notice what’s not on that list: a profit. Instead, the task is to find evidence that someday, preferably sooner rather than later, actual earnings will appear. Call this approach the Amazon model.
While higher interest rates and other forces are tanking technology shares at the moment—the tech-heavy Nasdaq 100 is down 15% this year, versus a 10% dip for the broad-market S&P 500—any investor would be foolish to eschew tech going forward. From smartphones to cloud computing, it has become the central nervous system for our world. The only question is which stocks to select—and we found 12 below that are worth a look.
Cloud Computing
This has rapidly become the basic infrastructure of the tech world. Large cloud players such as Adobe (ADBE) get much of the attention. Snowflake (SNOW), though, is giving them strong competition. A unicorn as a private company (valued at over $1 billion), data warehousing company Snowflake has impressed investors since its late-2020 IPO, as the stock doubled on opening day. Morgan Stanley analyst Keith Weiss has noted how its revenue has vaulted in recent years. Snowflake’s 12-month free cash flow broke even “a year sooner than originally forecasted” in his model, he writes in a report. Actual earnings should follow in due course. Meanwhile, the stock is down by a third this year.
Tellingly, even Warren Buffett (who famously used to avoid tech stocks) owns stock in Snowflake. “We’ve always known that the dream business is the one that takes very little capital and grows a lot,” Buffett remarked last year at his annual meeting, vis-à-vis this stock and others like it.
Snowflake’s special sauce is that it allows users to easily consolidate their various platforms. “It’s easy to pull data in a matter of seconds” from the company’s cloud infrastructure, says Dan Ives, senior equity research analyst at Wedbush Securities. Snowflake, which has been in business for 10 years, boasts over 3,000 clients, with more than 50 paying $1 million or more annually for its services. Morgan Stanley’s Weiss upgraded it to overweight recently, saying that he was impressed by its “nascent expansion opportunities gaining steam.” Investors, he adds, “are undervaluing the durability and quality of growth at Snowflake.”
Another good choice is Cloudflare (NET), public since 2019, says Dave Harden, chief executive of Summit Global Investments. Usually, when a customer moves from one cloud service to another, burdensome code changing must occur. Cloudflare’s architecture is such that this exercise isn’t necessary, says Harden. That has helped Cloudflare poach clients from the likes of Amazon Web Services.
Wedbush’s Ives also likes DocuSign (DOCU), which enables people to sign electronic documents and avoid the old hassle of scanning and printing out contracts and such. DocuSign, whose IPO was in 2018, is still unprofitable but has positive and growing free cash flow.
Chips
Semiconductors, the brains of modern electronics, are in short supply lately. GlobalFoundries (GFS), once privately owned by Abu Dhabi’s sovereign-wealth fund (still the majority stockholder), was one of the most popular IPOs of 2021. Over 30 days following its October market debut, the shares shot up almost 50%. While the price has ebbed along with those of other tech equities, GlobalFoundries didn’t sink as much as most, and its current price rests at a comfortable 23% above its IPO level.
GlobalFoundries’ origins aren’t in a garage, meaning it doesn’t fit the classic Silicon Valley startup story: The firm was formed in 2009 when Advanced Micro Devices (AMD) spun off its manufacturing arm. Today, GlobalFoundries is the world’s third largest contract chipmaker, with clients that include NXP Semiconductors and Broadcom, and it recently signed a deal with Ford Motor. Raymond James analyst Chris Caso is encouraged by the amount of long-term contracts GlobalFoundries has. The chipmaker plays up the fact that it owns no fabricating plants in China.
Its integrated circuits are used in personal computers and cars. “These are older” chips that don’t require a lot of sophistication or research and development, observes Caso, so they are cheaper to make. The company has improving fundamentals: For the past two quarters, the business turned a profit, and its earnings beat analysts’ estimates for the most recent period.
Other chip stocks to consider include Credo Technology Group Holding (CRDO) and SiTime (SITM), says Rohan Kumar, a portfolio manager at Hood River Capital Management. Credo provides chips for data centers and 5G wireless-service providers. It went public in January, during a market downdraft, and yet is up 60%. SiTime’s chips are used in timing—namely, they trigger sequences of processes in electronic devices. Spun off from Japanese chipmaker MegaChips, it has been public since 2019, is up more than 14-fold, and became profitable last year.
Big Data
Corporations are awash in data, covering a variety of sectors—from sales to accounting, from social media to the Internet of Things. Analyzing this vast volume is the province of big-data wranglers and their powerful computing abilities. Storing, organizing, and processing all this information, which also entails cleansing it of errors, is a vital endeavor nowadays.
One standout is Mongo DB (MDB), whose name stems from the word “humongous.” The company gathers and crunches the numbers for a wide array of businesses. Founded in 2007 by the trio behind the web ad firm DoubleClick (which Alphabet bought), Mongo has become one of the premier big-data companies, with 31,000 customers in 100 countries. Its stock is down along with peers, but still is 14 times as high as the October 2017 IPO.
“Mongo is the best one” of the big-data firms, says Julie Biel, portfolio manager and senior research analyst at Kayne Anderson Rudnick. “It grew from nothing very quickly.” The company, which sells subscriptions for its services, can boast rapid revenue growth, with last quarter showing an 87% boost year over year. Although free cash flow is negative, it is rapidly getting better.
Other notable big-data companies are Splunk (SPLK) and Datadog (DDOG), whose IPOs were in 2012 and 2019, respectively. Wedbush’s Ives named both as good prospects.
After a restructuring as it transitioned to the cloud, Splunk has seen its revenue rebound and its losses shrink. The company lists clients ranging from Honda to Intel to Papa John’s. Meanwhile, Datadog blew past Wall Street’s fourth quarter revenue estimates and turned profitable for the period. Further buoying the company was the new strategic partnership it announced with Amazon Web Services.
Cybersecurity
Hacks are a metastasizing problem for the world. Ransomware blitzes more than doubled last year, for instance. This baleful development has led to a flourishing cybersecurity industry. “The need for these companies is only going to grow,” notes Dave Mazza, head of product at Direxion.
A case in point is CrowdStrike Holdings (CRWD), whose growth has been stunning. A specialty for CrowdStrike is end-point security, shielding devices such as laptops and servers that are hooked into networks. “They are the leader here,” says KAR’s Biel. “Workloads are moving back and forth, and they protect you and your router.”
Even before it became a public stock, the firm had achieved renown—and landed in the midst of a political controversy. Launched in 2011, the company won acclaim for its ability to track hackers. It probed the cyberattacks on Sony Pictures and the Democratic National Committee, which led to the revelation that Russia had tried to influence the 2016 presidential election in favor of Donald Trump. As a result, Trump singled out CrowdStrike as an enemy.
Perhaps this high profile helped the company become one of the wow stocks of 2019 when its IPO price shot up almost 100% in a day. Last year, it was named to the Nasdaq 100, a rare honor for a public-market newbie. With revenue that has more than tripled over the past two years and ever-smaller losses, the stock has done well, until the 2022 tech wipeout.
Other notable players in this field, according to Wedbush’s Ives, are Palo Alto Networks (PANW), public since 2012, and Zscaler (ZS), whose IPO was in 2018. Both benefit from burgeoning revenue.
Palo Alto specializes in firewalls, which seek to protect traffic in and out of offices and data centers. “They study what’s normal in your system and then identify” things that seem intrusive, says Christian Munafo, a portfolio manager at the Private Shares Fund. Zscaler provides defenses for everything from data centers to mobile devices. “They are very innovative,” says Ives.
For this entire group, profits aren’t yet plentiful. Nonetheless, these firms stand a decent chance of achieving that blessed state, for investors willing to take the leap now.
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