The recent bear market has considerably reduced the appeal of most stocks. With many growth stocks down 75% or more from their highs, investors have increasingly looked to other investment vehicles.
But the downturn could actually bring opportunity to one type of stockholder: the long-term investor. These prospective buyers can now purchase stocks at a massive discount, which should dramatically increase returns once the market recovers. Three discounted tech stocks that would make great permanent additions to your portfolio are Microsoft (MSFT 0.37%), Axon Enterprise (AXON 0.28%), and Zoom Video Communications (ZM 0.05%).
This software giant still has much to offer
Jake Lerch (Microsoft): Bear markets can do more than just deflate your portfolio balance -- they can also reduce your faith in the stock market itself. After all, the whole point of investing is to grow your wealth, not see it dwindle.
So it's key for long-term investors to remember that a bear market will eventually give way to a new bull market. And when that happens, smart investors will profit from having bought -- or held onto -- shares of great companies. That's why I'm bullish on Microsoft right now.
Plenty of ink has been spilled explaining why Microsoft is such a fantastic company. It boasts one of the top (and fastest-growing) cloud businesses around. Moreover, its productivity and personal computing segments include some of the most well-known and trusted applications in the entire software industry. And yet Microsoft shares are down 29% year to date.
MSFT PE Ratio data by YCharts
In fact, from a valuation perspective, Microsoft shares are trading at close to their lowest level in five years. With a current price-to-earnings (P/E) ratio of 24.9, Microsoft shares are nearing their five-year low of 22.6, hit at the start of 2019.
That said, it's important to remember that a $5,000 investment made then would be worth $11,835 today. So, while bear markets can be scary, they can also be great opportunities. For investors looking for a stock with staying power, Microsoft is a name worth considering.
A focus on public safety and innovation
Justin Pope (Axon Enterprise): Law enforcement is one of the most fragmented public sector areas; there are roughly 18,000 police departments across the United States. It's also a tough job where keeping citizens and officers safe is of utmost importance.
Technology that can save lives is welcome, and that's where Axon Enterprise has built its company. Axon specializes in non-lethal technologies, beginning with Tasers, and is arguably known more today for its body cameras. It dominates the U.S. law enforcement sector, doing business with roughly 17,000 departments across America.
The company's growth won't wow you, but it has been very solid for a while now; revenue has grown by an average of 26% annually over the past decade. But you can see below how resilient the business is; public spending is highly dependable, and law enforcement budgets are typically safe from dramatic budget cuts. Additionally, the company is profitable, generating both positive free cash flow and net income on the bottom line:
AXON Revenue (TTM) data by YCharts
One might wonder where future growth will come from now, given that it is selling to most law enforcement departments. It will likely be from product innovation and selling additional products. The company has steadily added new services, including cloud-based software that helps law enforcement organize and handle evidence and operations more effectively.
Axon's ability to get more from its customers is evident in its 119% net dollar retention rate, and its cloud software sales have grown an average of 43% from 2017 to 2021, becoming its fastest-growing product.
Axon is a fundamentally sound company growing at a double-digit rate, just the type of stock you want to buy during a bear market when fearful investors are selling. The stock's fallen 43% from its high and now trades at a price-to-sales (P/S) ratio of 8, about its average over the past decade. It's not a bargain-basement valuation, but as Warren Buffett famously said, paying a fair value for quality is better than getting junk on the cheap.
The once-pandemic darling still has a bright future
Will Healy (Zoom Video Communications): Zoom's fortunes seem to rise and fall with the pandemic. It surged to record highs as locked-down workers turned to the platform to conduct business. However, once they began returning to the office, investors sold the stock.
Investors who bought $5,000 worth at the April 2019 initial public offering price of $36 per share still would have about $10,500 today. Indeed, that may offer little comfort to long-term investors, since the stock has fallen by more than 85% from its 2020 high.
Despite that decline, remote work has not gone away. In fact, it is becoming a permanent fixture in many workplaces and growing. An Upwork study estimates that 22% of workers will work remotely by 2025, up 87% compared with pre-pandemic levels. Zoom claims about 75% of the market, according to Datanyze, likely due to its low cost and ease of use.
Indeed, the $2.2 billion revenue level for the first half of fiscal 2023 (which ended July 31) grew by only 10%. This was far below fiscal 2022 when revenue grew by 55%. However, enterprise customers increased 18% to more than 204,000, and they spent an average of 20% more on the platform than they did one year ago. Also, the number of customers who spend more than $100,000 annually increased by 37%. Hence, while small and medium-sized businesses use the platform less, Zoom has grown popular with its higher-revenue clients.
Admittedly, overall revenue growth has slowed while operating expense increases remained elevated. This led to earnings for the first two quarters of fiscal 2023 of $159 million, down from $545 million in the same period last year. Still, its profits position the company to fund itself as rising interest rates make capital more expensive. This should add to the appeal of Zoom stock as it works to get growth back on track.
Moreover, its P/E ratio has fallen to 23, near a record low and well below the four-digit P/E ratios during the pandemic. As companies increasingly turn to remote work and online meetings, investors may want to take another look at Zoom stock.
