2022 has been tough sledding for technology investors. The Nasdaq-100 is down about 20% so far this year, with many high-flying stocks in the index down more than 50%. This can be a tough pill to swallow if you own many of these past high flyers, with lots of unrealized losses and the potential for years of waiting before their share prices recover.
On the other hand, if you have cash coming in and are looking to buy stocks, you should be celebrating this drawdown as it gives you an opportunity to buy several fast-growing technology stocks at discounted valuations.
Here are three top technology stocks that have seen some price correction and you might want to consider buying in May.
Image source: Getty Images.
1. Alphabet (Google)
Alphabet (GOOG -1.10%) (GOOGL -1.23%) is the parent company of Google Search, Google Maps, Android, YouTube, Google Cloud, and many other businesses. It is one of the largest companies in the world with a market cap of $1.55 trillion. The stock is down 19.2% this year, in part because investors were disappointed with its Q1 2022 earnings results.
Now could be a great time to scoop up some shares of Alphabet stock. Why? Because the conglomerate is still growing quickly and now trades at a much more reasonable valuation. In Q1, overall revenue grew 23% year over year to $68 billion with a 30% operating margin. Growth was mainly driven by Google Search, which hit $39.6 billion in revenue in the period, up 24% year over year. Google Cloud also grew quickly, at 44% year over year to $5.8 billion.
Over the past 12 months, Alphabet has generated $69 billion in free cash flow. Compared to its market cap of $1.55 trillion, that is a price-to-free cash flow (P/FCF) of 22.5. And this is all while Google Cloud and the Other Bets division are both burning through billions of dollars a year funding their operations. Once Google Cloud starts generating profits (likely within the next few years), and if Other Bets can spawn more promising divisions like Waymo's self-driving cars, Alphabet's free cash flow should grow even faster than revenue over the next few years. In my book, that makes the stock a buy at its current valuation.
GOOG Free Cash Flow data by YCharts
2. Wix
Heading down to smaller market caps, Wix (WIX -0.30%) is a leading website building company that offers tools for people to run their businesses online. The stock is down a whopping 53% this year and now trades at a market cap of $4.25 billion.
As of the end of 2021, Wix had 6 million paying subscribers across its services. This translates to $1.01 billion in website subscription annual recurring revenue (ARR). On this revenue alone, Wix stock trades at a price-to-sales ratio (P/S) of around 4.5. It doesn't generate consistent profits, but with website subscription gross margins of 76%, a P/S below five seems rather cheap.
And it's not like this division is shrinking, either. ARR was up 15% year over year in fourth-quarter 2021 and 43% from two years prior, showing the consistent revenue growth that comes with a subscription model.
On top of website subscriptions, Wix has moved into e-commerce websites and payment services. This revenue gets categorized under its Business Solutions segment, which grew revenue by 59% year over year in 2021 to $319.4 million. The segment has low gross margins of 20% right now. However, management thinks margins will expand once the payments business scales.
Wix is not profitable right now. But with consistent growth, stable subscription revenue, high gross margins on its subscription business, and a relatively low P/S ratio, the stock looks attractive at these prices.
3. Olo
Olo (OLO -0.43%) is a recent IPO that has fallen about 58% from its IPO price, set in March 2021. This puts the stock at a market cap of $1.7 billion right now.
The company enables large restaurant chains to easily offer and facilitate online and delivery options for their customers. These include restaurants like Five Guys, Cold Stone Creamery, and Wingstop. At the end of 2021, Olo was serving 79,000 restaurant locations. Revenue was up 52% year over year to $149.4 million in 2021, with an operating margin of 14%. Olo is able to achieve positive operating margins while investing so much for growth because it has best-in-class gross margins of around 80%.
Olo's growth model is simple. It adds more restaurant/chain locations under its belt while simultaneously getting more locations to add new services like Olo Pay. With a huge chain restaurant opportunity in the U.S. and a delivery/online ecosystem growing more complicated by the year, I wouldn't be surprised if Olo can grow at a high rate for many years.
In 2022, management expects Olo to generate around $196 million in revenue at the high end of its guidance. At the current market cap of $1.7 billion, that gives the stock a P/S of 8.7. While not dirt cheap even with a high gross margin, I think Olo stock is a buy here if you believe it can keep up its rapid revenue growth rate over the next few years.
