High inflation, rising interest rates, and other macro headwinds caused many investors to broadly shun growth stocks this year as the S&P 500 lost more than 20% of its value and the Nasdaq Composite sank by over 30%. However, this ongoing bear market also created some incredible buying opportunities for investors who can tune out the near-term noise.
So today, I'll highlight three high-growth tech stocks I'd still buy in this bear market without any hesitation: ASML Holding (ASML 3.38%), Datadog (DDOG 3.58%), and Palo Alto Networks (PANW 4.19%).
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1. The semiconductor play: ASML
ASML is arguably the world's most important semiconductor equipment company. It's the world's largest manufacturer of photolithography systems, which are used to etch circuit patterns onto silicon wafers. It's also the only maker of high-end EUV (extreme ultraviolet) lithography systems, which are used by foundries to create the world's smallest and densest chips.
The world's most advanced foundries -- Taiwan Semiconductor Manufacturing, Samsung, and Intel -- all require a steady supply of ASML's EUV systems, which cost about $200 million each, to manufacture their newest chips. The Dutch company's monopolization of this crucial technology makes it a great way to gain exposure to the entire semiconductor sector without betting on a single chipmaker.
Between 2018 and 2021, ASML's revenue rose at a compound annual growth rate (CAGR) of nearly 20%, while its EPS increased at a CAGR of 33%. Its near-term growth will decelerate as supply chain constraints limit its shipments of new systems, but that slowdown isn't related to the market's demand, which continues to outstrip its available supply.
ASML's stock got a bit overheated last year, but it now trades at just 24 times forward earnings. I believe that reasonable valuation makes it a very compelling investment, even if the broader semiconductor market gradually slows down.
2. The hypergrowth cloud play: Datadog
Datadog's cloud-based platform accumulates diagnostic data from a wide range of servers, databases, and apps across a company's infrastructure. It then organizes that information onto visual dashboards for IT professionals, which makes it much easier to spot and diagnose potential problems.
Datadog went public in late 2019. Its revenue surged 66% in 2020 and jumped 70% to $1.03 billion in 2021, and it expects 60%-61% growth this year. Its number of customers that generated over $100,000 in annual recurring revenue (ARR) more than tripled from 858 at the end of 2019 to 2,600 in the third quarter of 2022. Its dollar-based net retention rate, or its year-over-year revenue growth per existing customer, has also remained above 130% over the past year.
Datadog isn't consistently profitable by GAAP (generally accepted accounting principles) measures yet, but it turned profitable on a non-GAAP basis in 2020. Its non-GAAP EPS more than doubled in 2021, and it expects another 88%-92% growth this year. Datadog's stock might initially seem a bit pricey at 72 times forward earnings and 11 times next year's sales. However, I'd argue those valuations are pretty reasonable relative to those of other hyper-growth stocks, and that it still has plenty of room to expand as more large companies recognize the long-term value of its unified IT dashboards.
3. The cybersecurity play: Palo Alto Networks
Cybersecurity companies are generally resistant to macroeconomic headwinds because their customers won't lower their digital defenses just to save a few dollars. However, many cybersecurity stocks still fare poorly during market downturns because they're either unprofitable or too pricey.
Palo Alto Networks is a cybersecurity leader that provides a comfortable balance of growth, profitability, and value in this wobbly market. It currently operates three main platforms: Strata, its legacy next-gen firewall and network security suite; Prisma, its cloud-native security services; and Cortex, its platform for AI-powered threat-detection tools. Prisma and Cortex, which it dubs its next-gen security (NGS) services, drove most of its recent growth.
Between fiscal 2012 and fiscal 2022, which ended this July, Palo Alto's annual revenue rose at a CAGR of 36% to $5.5 billion. For fiscal 2023, it expects its revenue to rise 25%, and for its non-GAAP EPS to rise 24%-26%. It also expects to turn firmly profitable by GAAP measures for the full year.
Palo Alto's stock might not initially seem cheap at 54 times forward earnings and 6 times next year's sales, but it's a lot cheaper than higher-growth (but unprofitable) cybersecurity plays like CrowdStrike, Zscaler, and SentinelOne. That makes it my favorite long-term play on the cybersecurity market, and a no-brainer buy during this market pullback.
