The high-growth technology sector has been clobbered of late, but bargains are starting to crop up.
This has been a history-making year in more ways than one. The unprecedented coronavirus pandemic initially clobbered equities and sent them into a first-quarter tailspin. The 34% the benchmark S&P 500 lost in under five weeks represents the quickest bear market decline of at least 30% in history.
Following this historic plunge, investors saw the S&P 500 recoup everything that was initially lost (and then some) in a roughly five-month rally. This marked the quickest recovery on record from a bear market bottom to fresh highs.
Now history appears to be repeating itself. You see, over the past eight bear markets dating back to 1960, there have been a grand total of 13 corrections ranging between 10% and 19.9% within three years. This is to say that bear market bounces don’t simply go straight up. Every bounce inevitably leads to one or two sizable corrections.
What’s particularly interesting about the current correction is that it’s being led by technology stocks. High-growth tech stocks paced the rally from the March 23 low, but now the tech wreck is pushing the broader market lower.
However, downside in equities isn’t necessarily bad. While market corrections might hurt your personal bragging rights with your friends and family for a couple of weeks or months, they’ve always historically represented opportunities to buy into high-quality companies at bargain prices. Bull market rallies have always put corrections into the rearview mirror.
If the current tech wreck continues, the following four stocks will become very intriguing additions to investors’ portfolios.
One of the largest publicly traded companies on the planet, Amazon (NASDAQ:AMZN), should find its way into investors’ shopping carts if it keeps declining.
Most folks are likely familiar with Amazon for its seller ecosystem, which, according to analysts at Bank of America/Merrill Lynch, is responsible for an estimated 44% of all online sales in the U.S. There’s no question that retail will be responsible for the lion’s share of Amazon’s sales for the foreseeable future.
But Amazon is far more than just an online retailer with razor-thin margins. Amazon also operates a leading infrastructure cloud service, Amazon Web Services (AWS). We were already seeing a growing number of businesses shift to an online/cloud presence well before the coronavirus disease 2019 (COVID-19) pandemic struck. COViD-19 has simply been a shot in the arm for AWS’ growth.
As of the June-ended quarter, AWS grew year-on-year sales by 29%. It was pacing over $43 billion in extrapolated full-year sales. Cloud service margins are much juicier than retail or ad-based margins, so this strong double-digit growth in AWS will push Amazon’s operating cash flow through the roof over the next three or four years. If Wall Street simply values Amazon at the midpoint of its price-to-cash-flow multiple over the past decade, it should be a $6,000 stock by the end of 2023.
Cloud stocks led this rally and have been among the hardest hit of late. Should the tech wreck continue, edge cloud computing services provider Fastly (NYSE:FSLY) is a name to consider buying.
Fastly has seen a steady surge in demand for its services — i.e., getting content to end users as quickly and securely as possible. Fastly was already growing lightning-fast prior to COVID-19, but the shift out of the traditional office environment has made online content and consumption all the more important.
The most recent quarter saw an uptick in spending from the company’s existing clients, as well as the most robust new client onboarding since the company’s initial public offering. New client creation is important for Fastly, but it’s the uptick in spending from its existing base of customers (some of which are brand-name companies) that’ll drive operating margin expansion.
Admittedly, Fastly isn’t generating a profit as of yet. But with every other metric moving in the right direction, it’s a company you’d be foolish (with a small ‘f’) to ignore.
Palo Alto Networks
Have I mentioned how important cloud computing stocks have become? If tech stocks continue to get mauled, cybersecurity company Palo Alto Networks (NYSE:PANW) might make for the perfect portfolio addition.
Among the many trends expected to yield double-digit growth throughout the decade, cybersecurity might offer the safest floor/return of the bunch. That’s because hackers and robots don’t take a day off just because the U.S. or global economy is struggling, or a business owner had a bad day. Protecting in-house and cloud networks has evolved into a basic-need service, providing a level of cash flow predictability that’s difficult to find in high-growth tech stocks.
Palo Alto is set to benefit from a necessary business transition that could adversely impact its operating results in the very near term, but greatly expand its margin potential over the long run. This transition involves de-emphasizing physical firewall products in favor of subscription services and cloud protection.
Further, Palo Alto has aggressively expanded its security solutions portfolio and appeal to small and midsized businesses via bolt-on acquisitions. This spending should allow the company to maintain a double-digit growth rate for many years to come.
Finally, investors should consider gobbling up shares of social media giant Facebook (NASDAQ:FB) if the beatdown on tech stocks continues.
An investment in Facebook is all about choosing the most dominant social media platform. It finished the June quarter with an insane 2.7 billion monthly active users on Facebook. That climbs to 3.14 billion if you include its other sites, such as Instagram and WhatsApp. On a combined basis, Facebook, Facebook Messenger, WhatsApp, and Instagram (not in that order) are four of the seven most-visited social platforms. Advertisers know they can’t go anywhere else to reach such a large and/or targeted audience, affording Facebook incredible ad-pricing power.
Facebook hasn’t even fully unleashed its growth potential. With the vast majority of its revenue coming from advertising, it’s only collecting ad revenue from its flagship Facebook platform and Instagram. WhatsApp and Facebook Messenger haven’t even remotely been monetized by the company yet.
Facebook also has the potential to move beyond advertising revenue. The company’s Facebook Pay service is just one example of a way it can supplement its revenue growth.
Author: Sean Williams
Source: Fool: 4 Stocks to Buy if the Stock Market Tech Wreck Continues