While the S&P 500 was up about 29% in 2021 including dividends, 2021 was the rare year that the technology-heavy Nasdaq Composite lagged, up "only" 22%.
But even within the technology index, large companies such as the FAANG stocks and a few large chipmakers accounted for a lot of the gains. Starting in February and then accelerating in November, many high-growth tech stocks sold off hard, with many actually ending the year significantly in the red.
Of course, long-term tech trends aren't slowing down anytime soon. So with many high-growth names having already had big corrections, the following three tech stocks look like strong rebound candidates in 2022.
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Skillz
Mobile gaming platform Skillz (SKLZ 2.64%) went public through a special-purpose acquisition company (SPAC) in December 2020, riding a wave of enthusiasm for new SPACs coming into the year. Yet after peaking in late January and early February, it's been a long, painful decline. The stock finished the year down 63%.
While Skillz probably got ahead of itself amid the speculative SPAC frenzy, its valuation seems downright prudent today, at just 7.9 times sales. While Skillz is currently not profitable, it did grow revenue 70% last quarter. And thanks to its highly efficient two-sided platform in which gamers supply revenue through buy-ins and outside developers supply gaming content, the gross margin is sky-high at 92.5%.
So why is Skillz so unprofitable? Well, as a young, fast-growing company, it's spending a ton of money on sales and marketing -- in fact, more than it's making in revenue.
Still, that sales and marketing spend is getting more efficient, growing only 56% last quarter -- lower than the 70% revenue growth. And marketing spend could get even more efficient following last summer's acquisition of Aarki, a demand-side programmatic ad platform.
Finally, Skillz CEO Andrew Paradise is putting his money where his mouth is, buying about $5 million in stock back in November, at an average price around $11.50. That's $4 higher than today's lowly price of $7.44. The low price and improving marketing efficiency could help Skillz stock regain its footing -- perhaps in a big way -- in 2022.
Alteryx
2021 was also unkind to data analytics software company Alteryx (AYX), which saw its stock cut in half. It's a bit difficult to understand why Alteryx fell so much to a lowly valuation of just 7.8 times sales -- another relative bargain in the high-growth enterprise software industry.
While it's impossible to identify the specific cause, much probably has to do with Alteryx's odd accounting implementation of ASC-606, which came into effect in 2018. Because of the minutiae of the rule, Alteryx recognizes 35% to 40% of its software subscriptions up front, and the rest ratably over time. Alteryx has typically sold subscriptions with terms between one and three years, but as a result of the pandemic, customers are now renewing their subscriptions for shorter durations. Lower contract durations means there are lower "up-front" payments, even though the annualized value of the contract is the same, or even better. But since the company is going its first renewal cycle since the rule change, that is causing revenue to decline -- not what you'd normally associate with a software company.
Fortunately, management also gives an annualized recurring revenue (ARR) metric, which normalizes for the accounting quirks, presenting the annualized value of each current contract. Last quarter, that ARR metric grew by 29%, marking an acceleration over the prior quarter. Dollar-based net retention increased a solid 119%, while customer count grew 11% to nearly 7,700. Those are much stronger numbers than revenue declines would suggest.
While Alteryx's data and analytics software was traditionally deployed on-premise, it's also evolving to being deployed through the cloud as well. In November, Alteryx's analytics automation software suite became available on the Amazon Web Services (AWS) marketplace. Think of AWS marketplace as a curated digital store, not unlike an iPhone's app store, but for business and enterprises, who can buy software through AWS and pay for everything under one AWS bill. The availability on the largest cloud platform's marketplace could lower friction for customers to try Alteryx in their organization.
Alteryx believes it has a large market opportunity of $49 billion, as its analytics process automation suite can help workers across multiple departments within enterprises. That's in comparison to just $578 million in ARR as of last quarter. If the market really is that big, the cloud transition and adoption on AWS could reaccelerate growth in the new year.
II-VI
While II-VI (COHR 1.63%) wasn't down quite as much as the others on a full-year basis -- just 10% -- the stock is down more than 32% from all-time highs set last February.
II-VI is a leader in engineered materials for technology applications, producing lasers and optical solutions, as well as other substrates and composites used in all sorts of machines. II-VI's diverse end markets span communications, where it currently gets most of its revenue, along with industrial machines, semiconductor equipment, consumer electronics, life sciences equipment, and aerospace and defense. But perhaps its most exciting growth driver is the emerging silicon carbide market.
Because of its high conductivity and ability to withstand high temperatures, silicon carbide is a key material in power chips for electric vehicles as well as 5G base stations. II-VI is investing heavily in this area, earmarking $1 billion over 10 years as it aims to take the lead in this high-growth market.
2022 should also see the company close on its pending acquisition of Coherent (COHR), although this is not a 100% certainty. II-VI is paying a pretty penny to acquire Coherent and will take on a lot of debt to do so. Clearly, investors have been nervous, selling the stock off for this year. But assuming the deal closes this quarter, as many analysts anticipate, II-VI can get to work on integration.
II-VI has grown to its current size through many acquisitions, so it knows how to integrate companies. Management handily beat its initial synergy targets for its most recent large acquisition of Finisair, which closed in late 2019, so there is no reason II-VI wouldn't be able meet its $250 million synergy target for Coherent.
Hopefully, 2022 will see the Coherent acquisition close and supply chain constraints easing. Supply problems have limited revenue growth this year even as II-VI's backlog has soared to a record. With its shares trading at just 16.8 times this year's earnings estimates, II-VI is another cheap tech stock that could take off in 2022.
