Once growth bottoms out, these 10 companies should come roaring back.
The tech stock backlash is here. After enjoying unprecedented growth over the last two years as people worked, shopped and learned from home, the trend has flipped. Growth in digital services has slowed tremendously as people do more away from home. This has become a major problem for growth stocks. In some cases, analysts extrapolated a short-term surge in demand far into the future, leading to impossibly high expectations. That’s gone into reverse now. Bubbly valuations are coming back to earth, and opportunities are really starting to emerge. Nowadays, even the highest quality software stocks are trading down sharply, and there are absolutely stunning declines in some of the smaller and less established growth firms. Here are 10 of the best growth stocks to buy that could still deliver big returns for investors.
Alphabet Inc. (ticker: GOOG, GOOGL)
Over the past year, Alphabet’s share price has bounced between about $2,500 and $3,000. There appeared to be strong support for the stock, and it always attracted buying interest — until now, anyway. With shares now down to about $2,400, Alphabet is getting too cheap to ignore. Shares are trading at about 21 times trailing earnings and just 18 times forward earnings. Not including the company’s large cash balance, shares would be even cheaper. This is quite the valuation for the world’s dominant search business. That’s hardly Google’s only asset, either. Its cloud business is growing aggressively, and there are other irons in the fire such as the Waymo self-driving vehicle unit. Google may see some slowdown in revenue growth given industry conditions, but there’s a substantial margin of safety at this much lower entry point.
Meta Platforms Inc. (FB)
The largest tech stocks have gone from market darlings to castoffs in record time. Facebook parent company Meta Platforms is a great example of that. Just last fall, shares were making new all-time highs and the future seemed bright. Founder Mark Zuckerberg announced the company’s massive investment in the metaverse and plans to change its corporate name to Meta Platforms to highlight this transformation. Just months later, the metaverse is a target of ridicule and investors have given up on the company. To be sure, Meta faces problems with its core business, as the digital advertising business has slowed. However, Meta continues to throw off a simply tremendous amount of cash. Meta shares are trading at about 14 times earnings and less than 9 times earnings before interest, taxes, depreciation and amortization, or EBITDA. Meanwhile, analysts see Meta returning to profit growth in 2023. If and when that happens, Meta shares should be poised for a swift recovery.
Intel Corp. (INTC)
Investors are now favoring companies with strong profitability and cash flows over more speculative growth companies. With this change in investor preferences, more established tech companies are becoming more attractive. This puts a company like Intel back into the discussion. Intel’s stock performance certainly trailed more nimble rivals such as Advanced Micro Devices Inc. (AMD) in recent years. However, the core business continues to be second to none in terms of generating cash flow in the semiconductor space. Intel produced a $22 billion profit and spent more than $15 billion on research and development in 2021. With shares at about 13 times earnings, this is a solid value for a company that remains a juggernaut in its sector. It’s also one of the few growth stocks that pay dividends, and it currently yields 3.1%.
Oracle Corp. (ORCL)
Oracle is another company like Intel that benefits from investors’ preference for profits and cash flow over future revenue growth prospects. The company is one of the world’s largest software firms by revenue. While it isn’t the most glamorous of tech shops, it retains a massive customer base. Users are accustomed to Oracle’s databases and other core products and are often hesitant to move to other options. This is the goal for software companies, after all: Get an established customer base and then generate a consistent stream of revenues for years and decades to come. Oracle isn’t just resting on its laurels, however. The company’s cloud computing offering, while not in the same league as Amazon.com Inc. (AMZN) or Alphabet, is making some inroads and offers substantial growth upside for Oracle. With the recent sell-off, shares are going for about 15 times forward earnings, so any top-line revenue growth should make this an attractive investment going forward.
Salesforce Inc. (CRM)
Salesforce is one of the world’s largest cloud software companies. In 2020, it was added to the Dow Jones Industrial Average, replacing Exxon Mobil Corp. (XOM). That ended up being a contrary timing indicator, as energy has trounced software lately. Regardless, Salesforce’s status as a Dow component highlights its stability amid a fast-changing landscape. Salesforce wisely has built a platform in recent years, adding communications and e-commerce functions on top of its core marketing management business. By making bold moves such as buying workplace messaging platform Slack, Salesforce has developed a wide product offering, making it a core piece of infrastructure for many Fortune 500 companies. Salesforce shares have slumped about 45% from their 52-week highs, making for an attractive buying opportunity.
Avalara Inc. (AVLR)
Unlike many cloud software stocks that aim at serving a mass market, Avalara is more of a niche player. The company focuses on tax compliance for e-commerce. There are only a couple of serious competitors here, giving Avalara a strong competitive position in a fast-growing market. Sales tax compliance has taken on increasing importance in recent years. A Supreme Court decision in 2018 made it far easier for individual states to charge sales tax on all transactions regardless of whether an e-commerce retailer has any physical presence in that state. After enjoying a big run-up in 2020, Avalara stock has now lost more than half its value. Slowing e-commerce growth combined with the tech sector plunge have traders moving out of smaller cloud firms such as Avalara. However, the long-term fundamentals are still favorable for e-commerce and, by extension, service providers such as Avalara.
Qualcomm Inc. (QCOM)
During the pandemic, investors may have gotten a bit too enthusiastic about Qualcomm. Shares of the semiconductor company focused on wireless communications tripled off of March 2020 lows. This may have been too ambitious. Qualcomm’s success, after all, is significantly tied to the rollout of new generations of wireless technology; meanwhile, telecom companies delayed some 5G spending during the pandemic. However, 5G rollout is happening in earnest now. Qualcomm has started to use its financial resources to diversify beyond just its core wireless market. Its efforts in building an automotive chip ecosystem, in particular, hold considerable promise. Shares are now down by a third off their highs, and Morningstar’s Abhinav Davuluri sees fair value at $163 compared to a closing price of $136.56 on April 25.
Applied Materials Inc. (AMAT)
Applied Materials is the leader in making tools for manufacturing semiconductor equipment. This has been a boom industry in recent years, as trends such as the Internet of Things have increased the overall demand for semiconductors dramatically. Throw in the supply chain issues of late, and semiconductor firms have enjoyed an historic windfall over the past two years. This has trickled down to the semiconductor equipment vendors such as Applied Materials. Now, Applied Materials stock is on the retreat, as investors fear that semiconductor demand may drop off significantly. That’s possible in the short-run. However, the cycle may not be nearly as bad as feared. Companies such as Intel are now building major new semiconductor factories in America to diversify their supply chains. This should provide ongoing sales momentum for Applied Materials, and meanwhile, shares are going for less than 14 times forward earnings.
StoneCo Ltd. (STNE)
StoneCo is a Brazilian e-commerce company that has lost about 90% of its value since its peak in early 2021, even as prominent investors such as Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B) and Cathie Wood’s Ark Invest have backed the company. Regardless, a perfect storm of rising interest rates, falling credit quality and political uncertainty in Brazil has led to a wipeout in payments companies, including StoneCo and PagSeguro Digital Ltd. (PAGS). Despite that, results remain strong. In March, StoneCo reported earnings that included an amazing 87% top-line, year-over-year revenue growth figure for the fourth quarter. StoneCo shares jumped on the upbeat earnings report and management’s improved guidance for the rest of 2022. However, StoneCo has rapidly sunk back toward the lows amid the broader tech sector sell-off. This creates a second opportunity to pick up StoneCo below the $10 mark.
Spotify Technology SA (SPOT)
Spotify is for music what Netflix Inc. (NFLX) is for movies and TV shows. That’s suddenly become a bad thing, given the implosion in Netflix’s stock price following its downbeat subscriber numbers in its most recent earnings report. Spotify stock has sunk to fresh lows following Netflix’s plunge. However, these companies are quite different operationally. Netflix spent more than $17 billion on content in 2021. It takes an incredible amount of money to pump out all those Netflix originals. Spotify, by contrast, has a far smaller original content budget. It still shares a large portion of its revenues with the record labels, but over time, Spotify should be able to negotiate better terms due to its dominant market share in the music industry. Unlike video, there aren’t so many viable streaming alternatives in music. Spotify faces some headwinds from the general slowdown in the subscription business, but investors are much too pessimistic on the music giant right now.
10 best growth stocks to buy for 2022:
— Alphabet Inc. (GOOG, GOOGL)
— Meta Platforms Inc. (FB)
— Intel Corp. (INTC)
— Oracle Corp. (ORCL)
— Salesforce Inc. (CRM)
— Avalara Inc. (AVLR)
— Qualcomm Inc. (QCOM)
— Applied Materials Inc. (AMAT)
— StoneCo Ltd. (STNE)
— Spotify Technology SA (SPOT)
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10 Best Growth Stocks to Buy for 2022 originally appeared on usnews.com
Update 04/26/22: This story was published at an earlier date and has been updated with new information.
