The uncertain macroeconomic environment has weighed heavily on the stock market. With inflation and interest rates on the rise, many investors have sold assets perceived as risky to hedge against the possibility of a recession.
The tech sector has been hit especially hard. The S&P 500 Information Technology index is currently 21% off its all-time high.
Why? Tech stocks are typically valued based on cash flow, and investors have been worried that an economic downturn would stunt growth, making already-rich valuations look even pricier. But the latest earnings results from Zscaler (ZS -3.62%) and Salesforce (CRM -7.28%) suggest that logic doesn't hold for all tech companies.
Image source: Getty Images.
Zscaler: The largest network security cloud
Zscaler operates the largest security cloud in the world. Its platform acts as an intelligent gateway that accelerates and protects networks and applications, safely connecting employees with corporate resources, regardless of device or location. Additionally, by delivering security from the cloud, Zscaler eliminates the need for costly on-site security appliances.
The company benefits from a powerful network effect built on its tremendous scale. Zscaler's infrastructure spans 150 data centers and handles 240 billion daily requests. That means it encounters millions of threats each day, and each one makes its artificial intelligence (AI) engine a little better at blocking attacks. To put Zscaler's reputation in perspective, research firm Gartner has recognized the company as an industry leader for 11 consecutive years.
Thanks to its strong position in a critical industry, Zscaler was once again firing on all cylinders in the third quarter of fiscal 2022 (ended April 30, 2022). The company beat Wall Street's expectations on the top and bottom lines, as revenue surged 63% to $287 million and non-GAAP earnings rose 13% to $0.17 per diluted share. Better yet, remaining performance obligation skyrocketed 83% to $2.2 billion, implying strong future revenue growth. Management also raised its full year guidance.
Looking ahead, investors have good reason to believe Zscaler can maintain that momentum. The company puts its market opportunity at $72 billion, and trends like cloud computing, remote work, and the ever-growing number of connected devices should be tailwinds for its business. Moreover, Zscaler has now demonstrated that it can thrive through difficult macroeconomic conditions.
Salesforce: The gold standard in CRM software
Salesforce specializes in customer relationship management (CRM) software. Its platform is designed to drive productivity across sales, customer service, marketing, and commerce. It also includes tools for analytics, application development, and data integration. Those resources help organizations engage customers and build loyalty throughout the customer lifecycle.
Fueled by its first-mover status and broad portfolio, Salesforce dominates the CRM industry. The company holds nearly 24% market share -- more than the next four competitors combined -- according to the International Data Corp. That strong market position continued to pay off in the first quarter, as Salesforce beat Wall Street's expectations on the top and bottom lines.
Revenue climbed 24% to $7.4 billion. While non-GAAP earnings fell 19% to $0.98 per diluted share, that figure still topped the consensus estimate of $0.94 per diluted share.
Salesforce also generated $3.7 billion in cash from operations, up 14%, and boosted its bottom-line guidance for the full year. Better yet, founder and CEO Mark Benioff noted that demand remains strong and the company is "not seeing any material impact" from the current macroeconomic environment.
Investors should be thrilled by that news. Salesforce has showcased its durability through several past downturns, including the dot-com crash in the early 2000s, and the company is well-positioned to weather the current market turbulence. With that in mind, management puts its addressable market at $248 billion by 2025, so Salesforce has plenty of room to grow its business.
A reason to be bullish
Cybersecurity and CRM software play a critical role in the modern IT ecosystem. For that reason, even if we're on the brink of a recession, organizations will need platforms like Zscaler and Salesforce. That means both businesses should continue to grow throughout the current downturn, and their latest quarterly earnings results are a bullish data point in support of that theory.
That doesn't mean both stocks will rocket higher right away. Many factors impact investor sentiment, which makes it virtually impossible to predict short-term price action. But Zscaler and Salesforce enjoy a leadership position in their respective industries, and both businesses look healthy. That should help the stocks rebound swiftly when the market eventually recovers.
More broadly, tech investors can breathe a sigh of relief. While the sector has been hit especially hard, Zscaler and Salesforce prove that high-quality businesses are capable of executing even in a turbulent macroeconomic environment.
