What happened
The stock market began giving back some of Friday's gains on Monday, and as of 12:40 p.m. ET, the tech-heavy Nasdaq was down 1.1% -- with significant deviations.
Three tech stocks of particular interest today are videoconferencing app Zoom Video Communications (ZM 1.46%), down 4.6%; cybersecurity company CrowdStrike Holdings (CRWD 0.13%), down 5.7%; and cloud communications platform Twilio (TWLO 0.79%), down 9.4%.
Image source: Getty Images.
So what
Why these three stocks in particular? Let's start with the big picture: Inflation and interest rates are both up, which makes future profits less valuable and raises the cost of taking on debt while waiting for profitability to arrive. Consumer demand is waning, and a senior executive at least one big investment bank -- Goldman Sachs -- said in an interview Sunday that he sees a "very, very high" risk that the U.S. economy is going to go into recession.
In an environment like this one, an analyst at another investment bank -- R.W. Baird this time -- says it's particularly important to focus your stock investing on companies that have the balance sheets and free cash flow to survive in tough economic times. Problem is, the analyst does not think all of the tech stocks that proved so popular earlier in the pandemic fit this bill.
Twilio, for example, was one of three stocks downgraded by Baird today on worries about its financial condition, while Zoom Video got an endorsement from the analyst. And as many, many more tech stocks sell off today, it seems investors may be taking the advice to heart.
Now what
So how do these three tech stocks stack up -- and are their share price declines justified?
Let's start with Twilio. Over the past year, the company's racked up losses according to generally accepted accounting principles (GAAP) of just under $1 billion. And while its free cash flow situation isn't quite that bad, the company did burn $128 million in cash over the past 12 months. That's not a great start.
On the other hand, Twilio boasts a cash war chest $5.2 billion deep. Long story short, the company's at very little risk of bankruptcy even in the event of a recession. Although I have my doubts as to whether this unprofitable, cash-burning business is worth the $20 billion its market capitalization suggests, Twilio isn't going away anytime soon.
CrowdStrike is more of a mixed bag. Unprofitable as GAAP measures such things, CrowdStrike nevertheless generates copious quantities of cash ($463 million last year) and has $2 billion in the bank. At 78 times free cash flow, CrowdStrike stock is too rich for my blood, but so long as the cash keeps flowing, I don't see this business at much risk, either.
Last, and far from least, Zoom Video. I find actually myself agreeing with Baird on this one. Profitable with $1.4 billion in reported earnings over the past year, and $1.5 billion in free cash flow, Zoom has more cash than either CrowdStrike or Twilio -- $5.4 billion. At a valuation of less than 19 times free cash flow, Zoom stock looks rock solid to me and an excellent candidate for buying on weakness today.
Call me an optimist, but I think this one's going back up, and probably sooner than later.
