Growth stocks have been crushed in 2021 and early 2022, and investors picking individual stocks within the space have likely been hit much harder than the indices. While the broad market is only down in the high single digits for the year, many individual stocks have fallen 20%, 30%, or more in 2022 alone.
However, investors must recognize whether companies are falling because there have been fundamental changes in the business or just the sector at large is falling. In the case of high-growth tech stocks, the sector at large is dropping, including stock that doesn't necessarily deserve it. Both Unity (U 0.07%) and Atlassian (TEAM 0.27%) have reported strong earnings results, yet have fallen in price, which is why I think these are two stocks investors should consider buying during this tech stock sell-off.
A gaming giant
Gaming stocks have a bright future ahead of them because of how big the space is expected to grow. Twenty years ago, the gaming industry was worth just $15 billion. Now, it is worth over 10 times that with 2.6 billion gamers. More importantly, gaming is expected to be the fastest-growing market in media in the future, and Unity could be one company that reaps major benefits.
Unity's platform allows developers to create, operate, and monetize video games -- competing with Epic Games' Unreal Engine, but Unity's platform is built on simplicity. In terms of coding, it is much easier for new and intermediate game developers to build with Unity compared to the Unreal Engine, and this gives Unity a leg up. If the gaming industry is expected to grow rapidly, there will undoubtedly be many new developers looking to start producing games, and with Unity's simpler platform, it could be the go-to engine to power the next generation of games.
Unreal does have Blueprints -- plug-and-play models that make it easier for non-coders to create games on its platform -- but that could diminish the uniqueness of a developer's game if multiple developers use similar Blueprints. For creators who want to code and develop their own games, Unity is typically thought of as the go-to platform, and this position has allowed them to capture impressive growth.
The company grew revenue 43% year over year (YOY) in Q4 to $314 million. This was driven by 49% YOY growth in its Create Solutions -- reinforcing Unity's position as the leader for new developers.
The company lost $533 million in 2021, but with $1.7 billion in cash and short-term investments on the balance sheet, the company has time before its profitability jeopardizes the company. Unity is relatively highly valued, but this valuation has fallen to a much more reasonable level over the past few months.
It currently trades at 27 times sales -- higher than other gaming companies like Roblox, which trades at 19 times sales -- but this has fallen from 50 times sales just a few months ago. These prices are much more appealing than in past months, and with shares down 46% from their all-time highs, I think Unity could be a great stock to buy today.
The team facilitator
Atlassian also had a strong quarter, which it reported on January 27, 2022, where it beat both the top and bottom lines. The company's revenue soared 37% YOY to $689 million in its second fiscal quarter, and its net income declined sharply from $622 million in the year-ago quarter to $72 million in Q2. Granted, the company's year-ago net loss was driven higher by negative changes in convertible senior notes, but even excluding these changes, the company's net loss declined from $83 million.
Atlassian is a dominant leader in the team management space, helping over 225,000 customers work and collaborate more efficiently. It has been making a drastic shift, however, from on-premise tools to cloud-based tools. Atlassian stopped selling its on-premise licenses in early 2021 and has focused on encouraging a shift to cloud-based operations. This strategy has been quite successful: In its most recent quarter, its cloud revenue grew 58% YOY, jumping from 46% to 53% of revenue.
Atlassian has fallen over 30% off its all-time high set in October 2021, largely caused by interest rate and inflation fears that have battered tech stocks over the past several months. Considering this market leader is still growing rapidly despite its industry leadership, the company will likely continue to succeed in lieu of these risks.
Like Unity, shares are highly valued, but many project management companies trade at premiums. Monday.com -- an Atlassian competitor -- trades at 28 times sales, not much lower than Atlassian's valuation of 33 times sales. The team management space will continue growing as the world becomes more globally interconnected, which is why I would be willing to buy more shares, with shares 30% cheaper today.