In March, the tech-heavy Nasdaq Composite dropped into a bear market as stocks sold off in response to high inflation and rising rates. The losses accelerated in the second quarter, with the Nasdaq trading 31% off its high by the end of June. But certain billionaire money managers saw that as a buying opportunity.
Ken Fisher of Fisher Asset Management added to his position in PayPal Holdings (PYPL -2.47%) in the second quarter. Likewise, Jim Simons of Renaissance Technologies added to his position in Arista Networks (ANET 3.03%). Of course, the Nasdaq has recouped some of its losses since the end of June, but PayPal and Arista stocks are still trading down 76% and 36%, respectively.
Here's why both stocks are worth buying today.
1. PayPal: The most accepted digital wallet in North America and Europe
Unlike most payment processors, PayPal operates a two-sided network designed to engage both businesses and consumers. On one side, PayPal enables businesses to accept payments, in person and online, and it provides adjacent solutions like point-of-sale software and fraud protection. On the other side, it enables consumers to spend, save, invest, and shop through PayPal and Venmo digital wallets.
That two-sided ecosystem gives the fintech company an edge. With data from both sides of the transaction, PayPal can more effectively identify fraud. It can also leverage purchase data to boost sales for merchants by identifying relevant shopping deals for its digital wallet users. In fact, PayPal plans to redesign the shopping hub in its digital wallet in the second half of the year to better engage consumers, which should ultimately benefit merchants.
The benefits of PayPal's two-sided marketplace place are crystal clear. Today, PayPal ranks as the most accepted digital wallet in North America and Europe, and its logo inspires trust on both sides of the transaction, driving materially higher conversion rates for merchants. Consumers are nearly three times more likely to complete a purchase when PayPal is available at checkout.
Not surprisingly, the company delivered a respectable financial performance over the past year, though temporary headwinds like high inflation and the loss of eBay's business certainly slowed growth to some degree. Revenue climbed 11% to $26.3 billion and free cash flow rose 8% to $5.2 billion. But investors should look for those figures to accelerate. The impact of the eBay migration will be inconsequential by the end of the year and, more broadly, PayPal should benefit greatly from the secular shift to digital wallets.
Approximately 4.4 billion consumers will use digital wallets by 2025, according to Juniper Research, roughly double the number of digital wallet users in 2021. Additionally, digital wallets will continue to take share from cash and payment cards, both in-store and online, according to data from Worldpay. That means PayPal is well positioned to capitalize on what management believes is a $110 trillion total addressable market (TAM), though it has captured just 1% of its TAM today. That's why this growth stock is a buy.
2. Arista Networks: The market leader in cloud networking
Modern data centers must cope with an ever-growing number of connected devices and complex applications, and Arista provides the high-performance networking solutions that make that possible. Its portfolio includes switches and routers, wireless access points, and adjacent software for network automation, monitoring, and security.
Cisco Systems still leads the broader switching market, but Arista has steadily taken market share over the past decade, and that trend is set to continue. Its networking platforms offer industry-leading speed and capacity, which has made Arista the gold standard in high-bandwidth settings. That bodes well for the future because the data centers of tomorrow will require faster networking solutions as cloud computing and data-intensive applications become more common.
Arista's success is due in large part to software innovation. A single version of its Extensible Operating System runs across every piece of Arista hardware, allowing clients to deploy and manage a seamless network across public clouds, private data centers, and enterprise campus workspaces. That differentiates Arista from legacy vendors like Cisco, which utilize numerous versions of multiple operating systems, burdening IT teams with complexity.
Financially, Arista is growing at an impressive clip. Revenue jumped 33% to $3.5 billion over the past year, and profits rose 41% to $3.24 per diluted share. But shareholders have reason to believe Arista can maintain that momentum. Management puts its total addressable market at $35 billion by 2025, and given its leadership position in cloud networking, Arista is well positioned to capitalize on that opportunity. That's why this growth stock looks like a smart addition to any long-term investor's portfolio.
