The Nasdaq-100 index, which is a barometer for the performance of the technology sector, has lost 29% of its value in 2022. A number of factors are to blame, including high inflation, rising interest rates, ongoing supply chain issues, and geopolitical tensions, all of which are hurting investor sentiment.
But investors shouldn't necessarily look at this as an excuse to sell. Rather, they should take this market downturn as an opportunity to buy quality stocks at a discount for the long run. While some of the most popular companies, like Apple and Amazon, are probably sure bets, a panel of three Motley Fool contributors identified three stocks that don't get quite as much attention, yet still have monster potential. The three are Confluent (CFLT -3.12%), PubMatic (PUBM -0.74%), and Atlassian (TEAM 0.11%).
Here's why these hidden gems are worth buying.
1. Confluent is the future of data
Anthony Di Pizio (Confluent): This company is worth just $7.6 billion, but it punches way above its weight when it comes to the impact it has on its 4,120 customers, some of which include the world's largest banks, retailers, and technology businesses. Confluent is a live data streaming platform designed to work with the popular Apache Kafka software, helping its customers gain real-time insights from their digital interactions.
If that sounds complex, looking at how companies use Confluent might provide a better understanding. Domino's Pizza, for example, uses the platform to give its franchisees a live, detailed account of what's happening in-store so they can quickly identify technical issues or even pivot their sales strategies. Additionally, the company is using Confluent to refine its marketing channels to push more relevant advertisements in front of consumers to increase conversions.
That's the power of data even when looking backward -- it can provide actionable insights to make a business more efficient. But when the data is available in real time, the benefits can be game-changing. The faster a business can adjust its posture to meet consumer demand, the more productive and profitable it will ultimately be.
In the second quarter of 2022, Confluent had 107 customers spending $1 million or more on its platform annually, a jump of 53% year over year. It also had 857 customers spending $100,000 annually, up 39% in the same period. It drove a boom in Confluent's remaining performance obligations (RPOs) to $591 million, a whopping 81% higher than the year-ago quarter. RPOs are incredibly important because they are typically expected to convert into revenue in the future, pointing to the possibility that the company's sales could soar in the coming year or so.
If that's not enough, Wall Street is incredibly bullish on Confluent stock. Of the 18 analysts covering it (as tracked by The Wall Street Journal), not a single one recommends selling. In fact, one analyst, in particular, thinks it could more than double from where it trades today.
2. Don't sleep on small adtech leader Pubmatic
Jamie Louko (PubMatic): Don't let PubMatic's small $978 million market capitalization fool you, PubMatic is a dominant force in the advertising space. The company operates on the sell side of the advertising technology (adtech) market, meaning it helps publishers fill their available ad inventory. Despite its size, PubMatic is one of the top dogs in this fragmented space, with 3% to 4% market share at the start of 2022.
Unlike the independent buy side of the market, where The Trade Desk dominates, the sell side is much more fragmented. Magnite is PubMatic's primary rival, but PubMatic looks much more appealing than Magnite for a few reasons.
First is the company's growth rates. Magnite's expansion primarily comes by acquiring other businesses, but PubMatic's adoption is solely organic. Therefore, PubMatic's organic growth rates are much higher. In Q2, PubMatic saw revenue jump 27% year over year, while Magnite only increased revenue by 7% on a pro forma basis. This is also true in the connected TV (CTV) space. Magnite saw CTV revenue jump 19% organically in Q2 compared to the year-ago period, while PubMatic saw growth of 150% over the same period. As digital and CTV advertising become more prevalent, PubMatic looks better positioned to capitalize fully.
The other way PubMatic stands out is in its profitability. It has been profitable on a net income and an adjusted EBITDA basis for 13 and 25 quarters, respectively. In Q2, PubMatic posted an adjusted EBITDA margin of 37%. Comparatively, Magnite hasn't consistently generated positive trailing-12-month net income since it came public in 2014.
This profitability has allowed PubMatic to invest heavily into developing the best platform to gain market share. Judging by the growth rates of the two companies, it is working. This could allow PubMatic to take a large chunk of this lucrative digital advertising market, and at just 19.5 times earnings, you can buy this hidden gem for a decent valuation today.
3. Atlassian is a leader in workflow management software
Trevor Jennewine (Atlassian): Atlassian specializes in product development and collaboration tools. The company is best known for its Jira software family -- which includes solutions for project management, IT service management, and enterprise planning -- but its expansive portfolio also includes Confluence for content management and Trello for task management.
Atlassian benefits from a somewhat unique go-to-market strategy. The company primarily sells its products through its website without support from a direct sales team. That reduces friction for potential customers and it keeps marketing costs low for Atlassian, which allows the company to invest aggressively in product innovation. That advantage carried Atlassian to the top of several categories in the workflow management software space.
For instance, research company Gartner recently named Atlassian as a leader in enterprise agile planning tools, and Forrester Research recently recognized Atlassian as a leader in enterprise service management. Those accolades reflect the strength of its Jira software, but Atlassian's Confluence software also ranks as the most popular knowledge management platform, according to G2 Grid.
Financially, Atlassian delivered another solid performance in fiscal 2022, which ended June 30. Its customer base increased 18%, revenue climbed 34% to $2.8 billion, and adjusted earnings jumped 21% to $1.69 per diluted share. Shareholders should expect that trend to continue.
Atlassian currently puts its total addressable market at $29 billion, but that figure is growing at 14% per year, according to management. That creates a long runway for growth, and with shares trading at 21.4 times sales -- a slight discount compared to the five-year average of 25.9 times sales -- this hidden-gem growth stock is worth buying today.
