The stock market has been crazier than usual in 2020. Between the COVID-19 pandemic, the contentious election, and high-level sparring with China, we've seen a historic spike in volatility. That's even more true in the tech sector. While the S&P 500 market index dipped as much as 26% lower in March before recovering to a 9% year-to-date gain in early November, the tech-heavy NASDAQ 100 index only fell 20% and has skyrocketed 38% higher in 2020 as a whole.
The rising tide is not lifting every boat, though. Some tech stocks are lagging behind the NASDAQ 100's exciting gains and others are up for the year but have stalled in recent months. When strong businesses suffer poor market performance, that can be a signal to buy that high-quality stock for a bargain-bin price.
I have collected a handful of fantastic companies with exactly that combination of lagging market performance and rock-solid business prospects. Let's have a closer look at telecom networking equipment veteran Ciena (CIEN -2.46%), content delivery expert Limelight Networks (EGIO 8.08%), and e-commerce specialist Shopify (SHOP -1.79%).
This maker of high-speed networking gear intended for use in long-distance telecom networks was riding right along with the tech sector's big gains until early September. The company posted excellent third-quarter results but the report came with a side of disappointing guidance for the fourth quarter. CEO Gary Smith shared a dim view of market dynamics for the next couple of quarters.
"We now believe that the market will be roughly flat to down for this year, and this dynamic is already being reflected in some of the latest industry analysts forecasts and we expect that sentiment to continue," Smith said in Ciena's third-quarter earnings call. "Accordingly, we expect our orders and revenue to be adversely impacted for the next few quarters."
Share prices crashed 10% lower over the next two days and have stayed down ever since. All told, the stock is now trading 3% lower in 2020 at a price-to-earnings ratio of just 17 times trailing earnings and 13 times free cash flows.
Here's the fun part. The nervous investors who sold Ciena in September should have listened to Gary Smith's earnings commentary for a few more seconds. The modest short-term market view does not tell the whole story.
"I would stress that we believe that these challenges will be short-term in nature," Smith continued. "With bandwidth demand increasing at approximately 25% to 30% year-on-year, we do not believe it will be possible for our customers to serve that level of demand for more than a few quarters without increasing capacity. Importantly, our competitive position is incredibly strong and we remain the clear market share leader."
Customers will come back to Ciena over time if they want to stay competitive in a world of ever-increasing network speeds, 5G rollouts, rising use of video-streaming and online gaming services, and so on. You can't keep a good network equipment provider down for long, and you should take advantage of Ciena's fire sale while it lasts.
2. Limelight Networks
Speaking of video streaming and online gaming, Limelight Networks ties into these long-lasting growth trends from a different angle. Limelight's services help video services deliver their media streams instantly, with strong data security and a lower strain on long-distance network connections. The same is true for game downloads and cloud-based gaming platforms. On top of these organic growth engines, Limelight is also expanding its addressable market by adding edge computing functions and advanced network security tools.
This is another highly likely winner in the long run, and Limelight's stock is also down 3% year to date. Just a couple of weeks ago, the company delivered a mixed earnings report and lowered its full-year earnings guidance by a couple of pennies. The stock crashed hard and is still trading at a serious discount. In fact, I took advantage of this no-brainer buying opportunity and opened a Limelight position of my own on Nov. 2.
You see, Limelight's third-quarter earnings and lowered full-year guidance flowed from the company's decision to take on $106 million of long-term debt near the start of the third quarter. This cash infusion gives Limelight a ton of financial flexibility, allowing the company to accelerate its infrastructure investments or try entirely new ideas such as plug-in acquisitions. None of the debt-based cash has been put to use yet and the lowered bottom-line figures reflect the interest payments Limelight is making.
I love debt-free balance sheets, but there's a time and a place to rely on loans in order to take advantage of rare business opportunities. The explosive digital video market fits the bill, especially when paired with surging interest in edge computing and online gaming. Therefore, I would argue that Limelight's stock fell in response to some good news. That's completely backward, and Limelight shares are a screaming buy in November.
E-commerce technology expert Shopify started the year in fine form, rebounding from the marketwide meltdown of March to enjoy skyrocketing returns in April and June. And then it stopped. Shopify's stock has gained just 9% since the start of July, trailing behind the S&P 500's 13% gains.
Those swings add up to a 160% year-to-date gain, so I'm not asking you to cry for Shopify's current or long-term shareholders. It's not a cheap stock, either. Shopify stock is changing hands for more than $1,000 per share, trading at 45 times trailing sales and (keep some smelling salts handy, value investors!) 660 times trailing earnings.
You get what you pay for, though. Shopify's online storefronts and cloud-based point-of-sale solutions are tailor-made for the e-commerce boom of the COVID-19 era. The stock is overvalued if you think that online shopping will cool down when the pandemic crisis is over, but that's a huge mistake. We're actually watching a future giant of business services getting started on a tremendous long-term journey.
Shopify is busy building a digital retail service empire for the ages, reinvesting every available penny of spare cash into even more growth-friendly ideas such as new services or increased marketing budgets. The profits will come, just later. Revenue growth is the name of the game right now and it will stay that way for several years.
That's why a few months of stalled stock price gains equals an attractive buying opportunity. The stock may feel expensive today but you will soon look back at this plateau as a great buy-in window.