The past year was stinking for the stock market, and technology stocks were among the worst performers. Several stocks within the sector ended 2022 down more than 50%.
However, investors need to remember that it is rare for the US stock market to go down in consecutive years. Moreover, almost everyone expects a recovery sooner or later – it’s only a matter of time.
So when that inevitable rally happens, what are the names of the tech sectors that will lead the way higher? Three Motley Fool contributors have been selected DocuSign (DOCU -0.61%)And Amazon (AMZN 2.99%)And Meta platforms (Meta 0.20%) as primary candidates for return.
The Habibi pandemic is preparing to recover after a difficult 2022
Jake Lerch (DocuSign): DocuSign has already taken it on a chin in 2022. Its shares lost 64% of their value last year as the company faced several challenges.
With the Federal Reserve raising interest rates, growth stocks have lost much of their appeal, and DocuSign has fallen. A string of disappointing quarterly results led to the ouster of CEO Dan Springer in June. Since then, the company’s share price has leveled off, but remains 81% lower than ever. So why do investors think DocuSign can regain its magic?
Well, for starters, the company’s product is all over the place. Millions of people have become very familiar with DocuSign during the pandemic as in-person activities have been kept to a minimum. However, even now that social distancing is largely over, DocuSign is still the go-to solution for signing papers.
As a personal example, I’ve signed mortgage, auto, and insurance papers in the past two months – each time using DocuSign. But you don’t have to take my anecdotal word for it. Just look at the company’s financial statements.
Its delayed revenue over 12 months is $2.4 billion, up 18% year-over-year. It’s true that the company is no longer growing at the 50% surplus rate it experienced in the heart of the pandemic – but those growth rates will not be sustainable in the long run.
And while those high growth rates are in the past, so are the company’s inflated valuation metrics. DocuSign’s forward P/E multiple is now a reasonable 30, down from the frothy 150 multiple it traded for in the summer of 2021.
Meanwhile, the price to sales The ratio is a reasonable 4.8, almost on par with the alphabet (4.1) or an Apple (5.4). Compare that to 2020 when DocuSign traded with a price-to-sales ratio north of 30.
Moreover, the company’s future looks bright. While analysts are cutting their earnings estimates for many tech companies, they’re raising them for DocuSign. Wall Street now expects it to earn $1.92 per share in fiscal 2023, up from the consensus forecast of $1.65 per share a month ago. And if its earnings can come back, I think DocuSign’s share price can, too.
AWS will likely pay Amazon’s refund
Will Healy (Amazon): Amazon has lost nearly half its value since peaking in 2021, a drop that understandably makes many shareholders uncomfortable.
However, this is far from the worst decline the tech company has ever suffered. In 1999, after peaking at $5.65 per share adjusted share split, it began a steep decline thanks to the dot-com crash, reaching as low as $0.28 per share. This is a 95% decrease in less than two years.
And although it didn’t top out at $5.65 per share until 2009, Amazon would eventually establish itself as a stock returner and become one of the most valuable companies in the world. It reached as high as above $188 per share in 2021 before dropping to around $95 per share at the time of writing.
Second, Amazon Web Services (AWS), its cloud computing arm, has thrived even amid a market downturn and stock declines.
It is true that e-commerce remains the source of much of its revenue and keeps Amazon at the forefront of public awareness. However, e-commerce has recently become the loss-making leader amid negative operating margins. And even when Amazon was booming during the toughest phase of the pandemic, its e-commerce segments posted only single-digit operating margins. In contrast, AWS has achieved an operating margin of 30% over the past 12 months.
Moreover, AWS generated about $17.6 billion in operating income in the first nine months of 2022, up 33% from the same period in 2021. Overall, Amazon’s operating income was $9.5 billion in the first three quarters of 2022 – so AWS operating income carried the company.
Grand View Research predicts that the cloud will become a $1.55 trillion industry by 2030, which means a compound annual growth rate of 16%. With AWS holding a market leading 34% share of the cloud infrastructure market, this projected growth makes Amazon stock a buy, with or without e-commerce.
The worst may be over for this social media giant
Justin Pope (definition platforms): Meta Platforms had a year to forget in 2022. The social media giant’s stock lost a significant chunk of its value hampered by Apple’s user privacy improvements to iOS as well as many companies’ shrinking advertising budgets. Although it has recovered from the low point it touched last year, the stock is still about 65% below its high.
Well, the main Meta apps – Facebook, Instagram and WhatsApp – still attract eyeballs. The apps had 2.93 billion daily active users as of the end of the third quarter, and approximately 3.71 billion people use them every month. The more people you can place ads in front of, the more money you can make. And Meta’s user base is not declining despite its impressive market penetration. In the third quarter, the number of users increased by 4% compared to the previous year.
Also, problems with Meta ads are not unique. It is so commonly shared among companies that sell advertising space that many brands are tightening their belts in fear of a recession. After all, there isn’t much point in marketing your product if people aren’t spending money in the first place. For example, Alphabet’s YouTube recently reported its first drop in revenue since the company began publishing its numbers. In the advertising space, the tide of spending has gone, leaving everyone in a tailspin. When that condition eventually reverses, Meta’s business should rebound.
Finally, the stock is an absolute bargain. It has a free cash flow yield of 7.3%, and keep in mind that Meta spends heavily on the Reality Labs metaverse unit, which reduces free cash flow. Despite this, Meta stock still offers investors a great cash dividend for their money.
There is a lot of negativity about Meta Platforms, but the core business of advertising to a massive user base remains the same. Even if the company’s reverse efforts don’t ultimately meet the leadership’s great expectations, the stock could still perform well because Meta’s true golden goose is still laying eggs. Unless that changes, it’s hard to imagine this stock won’t eventually tell its comeback story.