Uncertainty is running high in the stock market right now. Inflation is hurting consumers, interest rates are about to tick higher, and geopolitical tensions in Europe are keeping investors on the sidelines.
That combination of factors has plunged the tech-centric Nasdaq 100 index into bear market territory, losing more than 20% of its value since November 2021. Many individual technology stocks have fallen even more sharply, and while it can be tempting to buy growth stocks at a discount, cheap doesn't always equal good value.
Investors with a long-term time horizon should turn their focus to quality companies. Here are two worth considering, and one that should be avoided.
Image source: Getty Images.
Why Microsoft is a buy
In a difficult market, it can be beneficial to seek safety in one of the world's largest companies. Microsoft (MSFT 0.43%) has a $2.1 trillion valuation, and a multi-decade track record of outperforming the Nasdaq 100 index. The company has built a suite of diverse businesses, so when some segments struggle during tough economic times, others tend to pick up the slack.
NASDAQ: MSFT
Key Data Points
Microsoft is best known for its software products, including the Windows operating system and Office 365, used by billions of customers globally, and that tends to be consistent across different economic environments. But the company also has a booming hardware business, consisting of the Xbox gaming console and Surface line of tablets and notebook computers. Both of these have become billion-dollar brands in their own right.
But an entirely different business is driving Microsoft's growth at the moment. It's the intelligent cloud segment, led by the Azure cloud services platform, which does everything from helping customers migrate to the cloud to providing complex artificial intelligence tools. It's used by 95% of Fortune 500 companies, and the cloud segment generated $67 billion in revenue for Microsoft alone over the last 12 months, making up the lion's share of its total sales.
Microsoft is also a highly profitable company, making it a great asset in a volatile market. Analysts expect it will deliver $9.35 in earnings per share in the current fiscal 2022 year, and with a current dividend yield of 0.87%, it will also return some of those profits to investors. That sets Microsoft apart from many other tech stocks.
Image source: Getty Images.
Why Bill.com is a buy
When it comes to making long-term bets on the American economy, Bill.com Holdings (BILL 0.11%) should be a top candidate for investors. It serves small to mid-sized businesses through a growing portfolio of software products and it has generated staggering growth over the last few years.
NYSE: BILL
Key Data Points
The company's flagship platform features a cloud-based digital inbox designed to help businesses aggregate invoices, to solve the often messy accounts payable workflow. Small enterprises can upload or receive invoices directly to their inbox, pay them with a single click, and thanks to integrations with core accounting software providers, Bill.com also books the transactions automatically.
But in 2021, the company expanded beyond its core offering through two key acquisitions. It purchased Divvy, a business budgeting and expense management software, and Invoice2go, an invoice generator to help with the accounts receivable process. Bill.com is now a very well-rounded service for businesses, and its popularity is soaring.
As of the recent fiscal 2022 second quarter, the company served over 373,000 business customers. And in that quarter, those customers generated $56 billion in transaction volume. Fees on those transactions is how Bill.com earns the majority of its revenue, and that revenue segment soared 313% year over year.
But Bill.com sees an enormous market opportunity on the horizon that includes 6 million business customers in the U.S., and over $25 trillion in yearly transaction volume on its platform. It means the company could have multiple years' worth of growth ahead, and since its stock price has declined 46% amid the tech sell-off, this could be a great buying opportunity for investors.
Image source: Peloton.
Why Peloton is a sell
There's no doubt about it: At-home exercise powerhouse Peloton Interactive (PTON 0.13%) is in the midst of a crisis. Its stock price is down 87% from its all-time high, as the company has struggled to perform after riding high on the pandemic-driven stay-at-home economy. A new CEO is at the helm and is already making promising changes, but Peloton is having difficulties in some key areas that might be completely out of management's control.
NASDAQ: PTON
Key Data Points
While the company sells hardware in the form of exercise equipment, it also has a recurring subscription business where users pay for digital workout lessons viewable on their Peloton product. The good news is that Peloton is still attracting a growing subscriber base, albeit at a slowing rate, but the bad news is customer engagement has fallen off a cliff. In the recent fiscal second quarter, the average subscriber completed 15.5 workouts per month, a 40% drop from the 2021 peak of 26.
It's a symptom of the fact that society has reopened, and people are spending far less time at home than they did during the worst of the pandemic. And unfortunately for Peloton, the result could be a shrinking business on a revenue basis.
|
Metric |
Fiscal 2021 |
Fiscal 2022 Guidance |
Growth |
|---|---|---|---|
|
Revenue |
$4.02 billion |
$3.75 billion |
(6.7%) |
Data source: Peloton Interactive.
But the company's losses are of greater concern. Despite a record-high revenue result in fiscal 2021, Peloton couldn't convert that to the bottom line, losing $189 million for the year. And in just the first six months of fiscal 2022, that loss has ballooned to $815 million.
But with that said, the company has begun to cut expenses by laying off 20% of its workforce, and Peloton's new CEO plans to revamp the cost structure to reduce net losses. At the same time, the way consumers pay for their Pelotons could dramatically change, with a greater focus on subscription-style revenue.
For now, this stock carries a little too much risk. The company will need to prove it can overcome the external factors and shift back to full-year growth -- until then, it's a sell.
