The market tends to overcorrect. In 2021, tech stock valuations were extremely elevated, and now many have swung too far to the downside. Investors tend to throw away exceptional companies right along with mediocre ones when broad market events happen.
Investors might be tempted to remain on the sidelines in the hope of catching the market's bottom, but keen investors use this period to their advantage. And while tech stocks have corrected, remember that the technology these companies deploy still powers our daily lives. Many are leaders in fast-growing industries and highly profitable.
Dollar-cost averaging, or purchasing incrementally, is an excellent risk-mitigation strategy -- allowing long-term investors to capitalize on lower prices without market timing. Let's look at some intriguing tech opportunities now.
The Trade Desk leads in ad tech
According to Nielsen (NLSN +0.00%), streaming viewership reached another all-time high in market share in March. It continues to chip away at cable and broadcast television, and this trend shows no sign of stopping. Because of this, advertisers are shifting their budgets to match viewing habits. That's excellent news for The Trade Desk (TTD +2.96%).
NASDAQ: TTD
Key Data Points
The Trade Desk provides a platform that connects advertisers and their agencies with billions of digital advertising opportunities daily. The company is big in streaming (often called connected television or CTV), video, and social media. It has access to over 120 million devices in the U.S.
The company works with several streaming services, such as Disney's (DIS 0.15%) Disney+ and Comcast's (CMCSA +0.00%) Peacock, but the best is yet to come.
Netflix (NFLX +1.15%) recently announced it is switching to a tiered service that will include advertising in some packages. Despite its stock price struggles, Netflix is still the king of streaming, and a relationship would be gigantic for The Trade Desk. It just so happens that a member of its board of governors is former Netflix CFO David Wells. Trade Desk CEO Jeff Green mentioned this during the last earnings call and suggested it could be beneficial.
The Trade Desk continues to grow sales at a tremendous clip. As shown below, it added $360 million in sales, or 43%, in 2021 alone.
Data source: The Trade Desk. Chart by author.
In addition, the company produces a large amount of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and is generally profitable on the basis of generally accepted accounting principles (GAAP). This separates it from many other high-growth companies.
The stock has fallen a whopping 50% this year, creating a potential buying opportunity for long-term investors who missed out on the previous run. It's trading lower on a price-to-sales (P/S) basis than before the March 2020 crash.
Texas Instruments is laser-focused on cash flow
The S&P 500 has dipped into bear territory, and the potential for a recession dominates the headlines. So I am looking for companies that manage cash flow and have shareholders as their top priority.
Not only does Texas Instruments (TXN +0.38%) provide an essential product in semiconductors, but since 2004 the company has grown free cash flow per share at a 12% compound annual rate. What's more, the company has raised its dividend each year during this time span at a terrific compound annual rate of 25%. This includes the period of the Great Recession.
CEO Rich Templeton summarized his company's philosophy when he said, "The best measure to judge a company's performance over time is growth of free cash flow per share, and we believe that's what drives long-term value for our owners."
Texas Instruments reported excellent sales and profit in 2021, increasing them by 19% and 38%, respectively. Earnings per share (EPS) rose 26%. The potential economic slowdown has spooked investors, and the stock has a lower price-to-earnings (P/E) ratio now than it did at the lowest point of the March 2020 crash. While the stock could go lower, long-term investors are seeing an opportunity for dollar-cost averaging.
Can AutoZone have another recession-beating performance?
As inflation causes vehicle prices to skyrocket in both the new and used markets, many Americans are putting off car buying in favor of repairing their existing vehicles. This should be to the benefit of AutoZone (AZO 1.53%), the giant retailer of aftermarket automotive parts and accessories. While it's not exactly a tech stock, the company has a large e-commerce business and vehicles today are as tech-laden as ever. A
CEO Bill Rhodes mentioned in the company's last earnings call that AutoZone's business has gone up during recessions and the pandemic. The stock significantly outperformed the S&P 500 during the Great Recession, as shown below.
AZO total return level. Data by YCharts.
Inflation will also have adverse effects on AutoZone. Shipping and inventory costs will likely rise, so it will be crucial for the company to manage costs effectively. Investors should keep an eye on its profit margins.
AutoZone reported 2.6% year-over-year growth in comparable-store sales in the fiscal third quarter of 2022 on top of the 28.9% growth last year. Diluted EPS continues to rise, and the company returns cash to shareholders through stock buybacks.
The P/E is within historical averages. If the company can again outperform during tough economic times, it can reward long-term shareholders.
