Tech stock investors have had a rough three months. The Nasdaq Composite Index has declined by around 16.6% from its peak back in mid-November as the growing prospect of higher interest rates has dampened investors' risk appetites. Some investors are panicking and selling. But smart investors with a long-term mindset should view this price drop as an opportunity to accumulate shares in well-run companies on the cheap.
Of course, not all growth stocks will recover fully from this recent (and prolonged) slump, so it pays to be careful when selecting tech companies trading at correction-level prices. The pandemic led to a surge in valuations for a wide swath of such stocks, and a combination of higher rates and perceived slower growth resulted in the sharp crash we've been seeing.
Image source: Getty images.
You want companies with strong business models and franchises as well as long-term catalysts that stand to do their stocks well over the long run. Here are three stocks that are worth buying during a tech stock correction.
1. PayPal Holdings
PayPal Holdings (PYPL 0.49%) runs a popular payments platform that helps to connect merchants with customers. The stock price is currently down about 66% from 52-week highs set in mid-July.
As digitalization gathered pace with the onset of the pandemic, the company witnessed strong growth for both its financial and operating numbers. PayPal had demonstrated a long history of growth even before the pandemic erupted, with net revenue nearly doubling from $10.8 billion in the fiscal year 2016 (FY2016) to $21.4 billion in FY2020. Net income has tripled from $1.4 billion to $4.2 billion over the same period, pointing to increased operating leverage within the company.
NASDAQ: PYPL
Key Data Points
The payments company has continued to report a stellar set of numbers for FY2021, with net revenue growing by 18% year over year to $25.4 billion and free cash flow rising by 9% year over year to $5.4 billion. Total payment volume (TPV) surged by 31% year over year to $1.25 trillion, and the business added 48.9 million net new active accounts, ending the year with 426 million active accounts.
PayPal's growth momentum is expected to continue, with TPV anticipated to grow by around 19% to 22% in FY2022. The company aims to add around 15 to 20 million new accounts for this year. Though this may seem much lower than the additions in FY2021, investors should remember that last year saw a spike in sign-ups as the pandemic pushed more people online. PayPal's growth may not be as swift as it has been over the last two years, but the business enjoys tailwinds that should allow it to continue raising its TPV and net income.
2. Meta Platforms
When it comes to social media companies, Meta Platforms (FB +2.31%) stands tall within the industry as the de-facto leader, with brands that include Facebook, WhatsApp, and Instagram. The stock price is currently down about 47% from 52-week highs set in mid-September.
The company previously known as Facebook went through a rebranding exercise last year as it shifted its focus to the metaverse -- an all-inclusive, virtual reality world where people can interact and communicate.
NASDAQ: FB
Key Data Points
Meta's financials received a strong boost in the last three years as the pandemic pushed more people onto social media to stay in touch with friends and loved ones. Revenue increased from $70.7 billion in FY2019 to $117.9 billion in FY2021, while net income more than doubled from $18.5 billion to $39.4 billion over the same period.
The number of users on Facebook, its core product, also saw an impressive increase. Daily average users went from 1.66 billion at the end of 2019 to 1.93 billion, while monthly average users climbed from 2.5 billion to 2.91 billion over the same period. When measured across its full range of apps, Meta's monthly active people metric grew from 2.89 billion two years ago to 3.59 billion.
The company intends to invest more money to build up its metaverse ambition. Already its social virtual reality platform, Horizon Worlds, saw users multiply tenfold from 30,000 to 300,000 within months of its launch in December. That said, investors may need to accept slower near-term growth as Meta spends to build the platform and infrastructure for the metaverse. The metaverse's long-term promise, however, should eventually outweigh these short-term negatives.
3. Netflix
Streaming TV pioneer Netflix (NFLX 0.10%) is growing from strength to strength as it rolls out a slate of new content on its platform. But that didn't keep the stock from falling about 48% since 52-week highs were set in November over concerns about subscriber growth and about inflation and rising interest rates.
Those concerns were likely overblown. Netflix has enjoyed a strong tailwind as new paid memberships surged due to more people being cooped up at home during the pandemic. Netflix added close to 36.6 million members in 2020, and another 18.2 million last year, bringing its membership base to a record high of 221.8 million at the end of 2021. Average monthly revenue per paying member has also steadily increased from $10.82 in FY2019 to $11.67 in FY2021.
NASDAQ: NFLX
Key Data Points
The company's financial numbers have also risen sharply since 2019. Revenue went from $20.1 billion to $29.7 billion within two years. But net income has nearly tripled from $1.9 billion to $5.1 billion. With the world adjusting to a new post-pandemic normal, Netflix has forecast just 8% year-over-year growth in paid membership additions for its fiscal 2022's first quarter. Although this number was significantly lower than the 22% year-over-year growth seen in fiscal 2021's first quarter, investors need to remember that the online surge was partly responsible for the strong numbers back then.
Netflix continues to beef up its portfolio of original content for 2022 and is also planning to expand its slate of games to new genres. The company has once again announced that prices will be raised for both its U.S. and Canadian customers; this is the sixth time since April 2014 that it has raised prices. Despite these price increases over the years, membership acquisition hasn't skipped a beat, demonstrating the pricing power that Netflix has over its competitors. Investors can expect to see average monthly revenue per paying member rise once again in 2022, and probably more in the years to come, signaling Netflix's ability to continually raise prices without impacting its member numbers.
