Technology stocks have been beat-up in the last few weeks as volatility has reared its ugly head once again. Many high-flying companies are now trading well into "bear market" territory -- a decline off of highs by at least 20%.
That doesn't mean now is a bad time to buy shares of tech. On the contrary, it could spell long-term opportunity when shares of good companies get beat-up. Three growing technologists that have plenty of room to grow in the years ahead are Palo Alto Networks (NYSE:PANW), Arista Networks (NYSE:ANET), and Control4 (NASDAQ:CTRL).
Tech on the rise means cybersecurity is on the rise
Nicholas Rossolillo (Palo Alto Networks): After a massive 60% return in 2018 through the summer months, shares of cybersecurity outfit Palo Alto Networks have pulled back nearly 20% from their all-time highs. That's a healthy move given the fact that the stock far outpaced the 21% revenue and free cash flow advance posted over the last 12 months.
That doesn't mean Palo Alto Networks stock is dead, though. On the contrary, there could be years of upside left in the tank. The company is a leader in the burgeoning cybersecurity industry -- especially for cloud-based networks. As organizations, data networks, and operations get more complicated and increasingly rely on the internet, Palo Alto is in a great position to help them secure it.
New CEO Nikesh Arora -- a former executive at Alphabet's Google -- took the reins over the summer and has already started delivering on some of his promises. Opportunistic acquisitions is one of them; Palo Alto recently completed the takeover of small rival RedLock, which it will combine with its cloud-security subsidiary Evident.io to bolster its position in that industry.
However, Arora has been primarily tasked with overseeing the company's transition from a high-growth endeavor to a more mature business where growth is balanced with profitability. So far, so good, with one quarter under Arora in the books. In the current quarter, management has forecast a 25% to 27% year-over-year revenue increase and a 41% rise in adjusted earnings. After the stock pullback, price to free cash flow -- or money left over after basic operations and capital expenditures are paid for -- sits at only 19.4, a fair price for a company still growing so fast.
With technology only increasing in importance, and the need to keep operations secure from the bad guys only increasing, this stock could soar in the years ahead if it can maintain its current momentum.
An upstart networking company with a solid niche
Chuck Saletta (Arista Networks): Our world is becoming ever more digitally interconnected. With the Internet of Things promising to take nearly everything -- including your toaster -- online, the demand for networking capability shows no sign of stopping anytime soon. That push to connect almost all that we do requires internet connectivity to be nearly everywhere, which is one key reason Arista Networks looks like such a compelling investment opportunity right now.
A networking leader that specializes in "campus networks" and ultra-low latency cloud networks, Arista Networks is well positioned for that trend. After all, as businesses, hospitals, universities, and other large locations bring more equipment online, the need for Arista's fast and "self-healing" networks will simply become more central to their way of operating.
Arista Networks has seen some blisteringly fast growth in recent years, and even looking forward, its earnings are expected to grow well above 20% annualized over the next five or so years. That solid anticipated growth is paired with a stock that's trading around 25% off its 52-week high, and closer to its 52-week low than that high. That gives potential investors a better entry price than they would have had by buying just a few short months ago.
The company's shares trade at around nine times revenue. That indicates that Arista Networks certainly doesn't look cheap based on backwards-looking measures. Still, if you recognize that its business is well positioned for the anticipated future of networking, there's a real chance for it to grow into that valuation, and even potentially soar beyond it.
Get connected with this stock
Daniel Miller (Control4): Imagine crawling into bed, and at the touch of a button, all lights turn off, shades lower, doors lock and security systems arm, and the room temperature is lowered -- that's one example of how Control4 can make many of your connected devices work together seamlessly. Control4, one of the hottest tech stocks last year, is a leading provider of automation and control solutions for the connected/smart home, and as Americans continue to increase the number of connected and smart devices inside their homes, the company has the potential to soar in the decades ahead.
To understand why Control4's stock could soar, it's important to understand what its target audience is. Control4 isn't a do-it-yourself product solution, such as Amazon's Alexa, and it's not a managed service like many alarm systems. Rather, Control4 is a professionally installed system that generally uses between 25 and 125 devices together seamlessly and often costs anywhere from $1,000 to $50,000 -- and even into the hundreds of thousands. In other words, this is an expensive premium solution, but Control4 estimates it's only penetrated roughly 1.5% of U.S. homes that generate over $150,000 in annual income, leaving plenty of room for growth.
Control4's premium solution is driving serious growth on its top and bottom lines. Consider the trailing 12 months ended with the second quarter of 2018: Its revenue jumped 17% compared to the prior year, and its adjusted net income jumped 48%. Also during that 12-month period, it generated $27 million in cash, has an $83 million pile of cash and no debt, and recorded 11 consecutive quarters of exceeding its revenue consensus estimates.
Management also launched a program in May that would open certified showrooms across the U.S., and a handful overseas, which are designed to draw in traffic, generate more sales leads, improve sales conversion rates, and expand brand awareness. As the number of connected devices increases in households across the world, Control4 appears well positioned to soar in the decades ahead.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chuck Saletta has no position in any of the stocks mentioned. Daniel Miller has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Arista Networks. The Motley Fool owns shares of Control4. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.