2 Beaten-Down Growth Stocks to Buy Now as Fed Pivot Hopes Surge
Jesse Cohen | Dec 14, 2022 11:16AM ET
- The Nasdaq is up 11.6% from its mid-October bear-market low.
- Several beaten-down high-growth tech stocks have staged impressive recoveries off their recent 52-week troughs.
- I recommend buying DocuSign and Okta as receding inflation fears fuel hopes of a near-term Fed policy pivot.
- *Year-To-Date Performance: -61.9%
- *Percentage From ATH: -81.5%
- *Market Cap: $11.6 billion
- *Year-To-Date Performance: -68.5%
- *Percentage From ATH: -76%
- *Market Cap: $11.2 billion
The Nasdaq Composite has rallied strongly since falling to a more than two-year low last month, with the tech-heavy index now up roughly 12% from its October 13 trough. Recent gains have been driven by signs that inflation may have peaked, fueling hopes the Federal Reserve will become less aggressive on interest rate hikes in the months ahead.
Taking that into account, I expect shares of e-signature software specialist DocuSign (NASDAQ:DOCU) and cybersecurity company Okta (NASDAQ:OKTA) to extend their recovery as investors pile back into beaten-down growth names following the year-long selloff.
Despite near-term challenges, both tech companies still offer further upside and have plenty of room to grow their respective businesses, given the robust demand outlook for their innovative tools and services, making them solid long-term investments.
h2 1. DocuSign/h2DocuSign has enjoyed a strong rebound since seeing its stock drop below $40 to reach the lowest level since January 2019 on Nov. 9, running about 46% higher in less than five weeks. However, shares of the beaten-down San Francisco, California-based software-as-a-service company - which soared throughout the pandemic amid the shift to the work-from-home environment - remain down 61.9% year-to-date and 81.5% below the August 2021 all-time high.
In my view, DocuSign could finally see shares bottom following their brutal selloff thanks to receding concern over the company’s long-term growth prospects under the leadership of new CEO Allan Thygesen.
Get The News You Want
The former Google marketing executive, who replaced former CEO Dan Springer in late September, has already made progress on the e-signature company’s turnaround efforts.
Despite the challenging operating environment, the digital signature software specialist delivered third-quarter earnings and revenue, which crushed consensus expectations earlier this month.
Total revenue came in at $645.5 million, rising 18% year-over-year. Subscription revenue was $624.1 million, an increase of 18% y-o-y, while professional services and other revenue was $21.4 million, an increase of 27% y-o-y.
In a sign that bodes well for the future, billings - a key sales growth metric - totaled $659.4 million, up 17% from a year earlier. DocuSign said that clients with annual contract values of greater than $300,000 grew roughly 24% from the year-ago period to 1,052, reflecting robust demand for its e-signature software tools from large enterprises.
Unsurprisingly, the average fair value for DocuSign’s stock on according to several valuation models - including P/E multiples - implies a 17% upside from the current market value over the next 12 months.
Source: Investing.com
h2 2. Okta/h2Similarly to DocuSign, Okta (NASDAQ:OKTA) has seen its stock drop 68.5% amid a worsening macro backdrop of higher interest rates, soaring inflation, and recession fears.
Even as OKTA stock remains down sharply for the year, shares have rebounded significantly since falling to a four-year trough of $44.12 in early November, rising almost 60%. At current levels, the San Francisco, California-based tech firm - which is still 76% away from its record peak of $294 touched in February 2021 - has a market cap of $11.2 billion.
In a sign of how well the security-software maker’s business has performed in recent months, Okta reported Q3 financial results that blew past Wall Street’s earnings and revenue estimates on Nov. 30. It also provided an upbeat outlook for the months ahead as it makes progress toward a return to profitability.
Total revenue jumped 37% year-over-year to a record $481 million thanks to strong demand from large enterprises for its cloud-based identity and access management software. Subscription revenue was $466 million, up 38% y-o-y, while total calculated billings were $532 million, an increase of 37% y-o-y.
The identity-and-access management specialist counted over 17,000 organizations worldwide as customers at the end of Q3, rising 22% from the year-ago period. Additionally, Okta now has 3,740 clients generating $100,000 in annual revenue, increasing 32% from 2,825 customers reported in the same quarter last year.
Widely considered the leader in the fast-growing identity and access management space, Okta is a solid pick going forward, in my opinion, as it looks to be one of the main beneficiaries of the continuing growth in cybersecurity spending amid the current geopolitical backdrop.
Indeed, 33 out of 34 analysts surveyed by rate OKTA stock either as ‘buy’ or ‘neutral,’ reflecting a bullish recommendation. Among those surveyed, shares had roughly 12% upside potential based on Tuesday’s closing price.
Source: Investing.com
Likewise, the quantitative models in point to a gain of 17.1% in OKTA stock over the next 12 months, bringing shares closer to their fair value of $82.40.
Source: Investing.com
Disclosure: At the time of writing, Jesse is long on the Dow Jones Industrial Average, S&P 500 and Nasdaq via the SPDR Dow ETF (DIA), SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ). He is also long on the Technology Select Sector SPDR ETF (NYSE:XLK).
The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.