Tech stocks have suffered in 2022 as investors backed away from risky stocks. In a time when inflation runs rampant, federal interest rates are inching upward, and there's a high-stakes war at the edge of Europe, perhaps it makes sense to prefer ultra-safe gold bars and federal bonds over yesteryear's market darlings.
Then again, the market correction also slashed stock prices on many high-quality companies that should make it through this tough period and thrive in the long run. Picking up these winners at a discount also makes a bucketload of sense. On that note, we asked three of the Fool's contributors to share their best deep-discount ideas in today's volatile market. Read on to see why they recommend Palo Alto Networks (PANW -3.25%), Monday.com (MNDY -2.67%), and Etsy (ETSY -0.73%) right now.
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A small and hungry fish in a big pond
Anders Bylund (Monday.com): As a provider of cloud-based app development tools, Monday.com is staring down a massive global market. The company has crushed Wall Street's expectations in each one of the three earnings reports it has delivered as a public company. In Wednesday's fourth-quarter update, for example, Monday's net loss was half the size your average analyst had expected and the top line came in 8% above the Street's consensus estimate. Sales nearly doubled year over year.
However, management set the financial guidance bar low with easily reachable revenue targets for the next quarter and fiscal year. Full-year sales are expected to land roughly 54% above the 2021 total -- a sharp slowdown from last year's 91% jump. Investors saw these lowball goals as a sign of weakness. The haircut was swift and brutal. Monday's stock plunged 30% lower on Wednesday.
I get it. Decelerating top-line growth can be scary when the company is unprofitable and has to be measured by its revenue-boosting chops. At the same time, Monday's management already has a history of exceeding its own revenue targets by a wide margin. Remember those far-too-modest fourth-quarter analyst estimates? They were largely in line with Monday's guidance for the period. This week's ultra-conservative guidance projections may very well turn out to be too humble, setting the stock up for a dramatic rebound as the high-octane growth story plays out.
And make no mistake -- I see plenty of rocket fuel in Monday's tanks. The company's app development platform provides a simple way to create business-ready software through a point-and-click process with little or no actual coding. The target market for this developer-friendly model accounts for annual sales of around $56 billion today and is only growing larger. Capturing even a small slice of that beefy opportunity should drive Monday's sales, profits, and share prices much higher.
That's why I think that the market reaction to Monday's fourth-quarter report was a big mistake. This company is poised to deliver outsized business growth in a wide variety of market conditions.
A leader in next-gen cybersecurity with strong free cash flow
Billy Duberstein (Palo Alto Networks): With the market combatting dual threats of geopolitical risks and rising inflation, cybersecurity companies that generate profits and cash flow today could be a good safe haven for your investment dollars. Russia is a very active player in cyber attacks, so businesses and governments worldwide will likely be looking to invest in the latest and greatest cyber innovations going forward.
Palo Alto Networks is a leader in cybersecurity, benefiting from a strong incumbent position in firewalls, along with a forward-thinking management team that has pivoted to cloud security software and security operations centers. Palo Alto recently reported very strong earnings that beat revenue and adjusted earnings per share, while also raising guidance for the full year.
The strong growth has been driven by an aggressive pace of innovation, with the number of major new product releases accelerating over the last four years, leading to an increasing consumption of cloud and next-gen software, and therefore higher revenue. As one example, Palo Alto's Cortex XSIAM product for security center operations, which was developed organically, has decreased the time to threat detection from 10 days to a matter of hours or even minutes.
That may be why Palo Alto has over 1,000 military customers at the end of the fourth quarter, and roughly 80 of the Fortune 100 large companies. Forty-seven percent of the Global 2000 also use all three of Palo Alto's major platforms, including its Strata firewalls, Prisma secure edge and cloud platforms, and Cortex security operations center tools.
Palo Alto guided for solid 25.5% growth in fiscal 2022 to $6.825 billion, and roughly 32% to 33% free cash flow margins, so it also stands to hold up in a rising rate environment. Actual profitability is lower, due to deferred revenue and upfront subscription payments, as well as high stock-based compensation.
However, on the conference call with analysts, CEO Nikesh Arora explained that stock compensation is currently higher than normal because Palo Alto was quite active on the acquisition front over the past three years as it aimed to bring in new cloud and security operations technology under its belt. Founders of those acquired companies received four-year stock vesting in Palo Alto networks to compensate them for the stock they were giving up in their own companies. However, Palo Alto is more or less complete with its acquisition spree, so as the company laps the four-year anniversary of those acquisitions, stock comp should taper off in the next couple of years. In the meantime, the company has been repurchasing stock to offset some of this high stock compensation.
All in all, with heightened tensions between the developed world and Russia, Palo Alto looks to be a beneficiary in this new environment, even if interest rates do rise a bit.
An online marketplace for a new generation of entrepreneurs
Nicholas Rossolillo (Etsy): Etsy was a scrappy underdog in the e-commerce space for years. Going up against entrenched marketplaces like eBay and Amazon, the company carved out a niche for itself catering to craftspeople and aspiring entrepreneurs looking for a place to sell online. As with all things e-commerce, Etsy's activity level exploded when the pandemic struck, but this is far more than just a one-off winner from 2020.
Full-year 2021 results are in, and Etsy said the value of merchandise sold (GMS) on Etsy.com and Reverb -- its marketplace for music equipment -- was over $13.1 billion last year. That's a 28% year-over-year increase, excluding Etsy's acquisition of Elo7 (the marketplace referred to as the "Etsy of Brazil," with a GMS of $32 million) and fashion marketplace Depop (GMS of $294 million) last summer. The resulting full-year revenue increased 35%, and was up 16% in Q4 -- impressive considering Etsy was lapping a 129% increase in sales during the holiday shopping season of 2020.
Clearly, Etsy's buyers and sellers are sticking with the platform. New shoppers continue to arrive in droves as they seek out unique items, and Etsy is always improving its site and app via machine learning to help custom curate the experience for buyers. Upping its game to help shoppers find the perfect item has worked wonders for Etsy, and applying the same tech to Reverb when it was purchased back in 2019 has quickly turned the music equipment exchange into a top spot for musicians to score a deal on new and used gear. Etsy hopes to replicate that template of profitable growth for both Elo7 and Depop in the coming years.
For the first quarter of 2022, management expects revenue to increase about 5% year over year as it laps one more quarter of the early pandemic boom. A seller transaction fee increase from 5% to 6.5% will kick in starting in April (Q2 2022), which Etsy says it will use to invest more into marketing and other seller tools. Shares now trade for 30 times enterprise value to free cash flow after the Q4 report. I remain optimistic on this online marketplace's long-term prospects.
