Heard about the rising wealth gap in America? It's a complex issue with numerous potential causes, but a recent study of portfolio data from the wealth management platform Addepar by university economists points out one potential reason. The study shows that wealthier households increase investments when the market is down and decrease when the market soars. The classic buy-low, sell-high strategy. People with less wealth tend to do the opposite, investing more as the market rises and taking money off the table when the market turns bearish.
Why is that? We know the best long-term returns come from buying stocks at a discount, but it can be tough to buy when the market retreats and all you see are headlines of doom and gloom.
The situation highlights the need for a consistent strategy, like dollar-cost averaging, to meet investing and retirement goals. With this in mind, investors should consider the market decline in 2022 an opportunity rather than a setback -- just like the wealthy do.
Consider putting your head in the clouds
Software, analytics, data storage, and a host of other functions are moving to cloud-based computing. This mass migration means increased demand for speed, reliability, and security. It also means increased investment potential. Arista Networks (ANET -3.04%), CrowdStrike (CRWD -3.54%), and The Trade Desk (TTD -3.79%) are three cloud-based companies to watch.
Arista provides customers with high-efficiency network equipment like switches and routers that allow cloud servers to connect with each other and the internet. The more demand we put on the cloud, the more important this tech becomes. We also need to protect data and systems from bad actors, and CrowdStrike's cloud-native cybersecurity platform, Falcon, does just that. Finally, The Trade Desk provides advertisers with a vital cloud-based platform to reach audiences on streaming television, mobile, online video, and other mediums.
Here's more about why investing in these three cloud-based tech stocks could be a genius move.
1. Arista's superior quality nets superior results
As mentioned, Arista'a tech enables the cloud by facilitating massive data transmissions at breakneck speeds. This tech includes hardware and its Extensible Operating System (EOS) software. Arista is recognized as a leader in multiple categories by research services Gartner and Forrester.
This has allowed Arista to take massive market share from industry giant Cisco Systems over the last decade, as shown below.
Data source: Arista Networks Q3 Investor Presentation.
Financial results are impressive as well. The third quarter saw record revenue of $1.18 billion, up 57% year over year, and operating income of $417 million, up 79%.
The secret is out on Arista, so the stock doesn't come cheap; its price-to-earnings (P/E) ratio is near 37, below its historical average but not in the bargain bin.
ANET PE Ratio data by YCharts
For this reason, interested investors should consider scaling into a position over time to take advantage of dips in the share price.
2. CrowdStrike's meteoric rise continues
Let's face it: Data and system security are paramount in today's world. Businesses, infrastructure, and governments are constantly warding off cyber threats. CrowdStrike's mission is to stop these breaches, and its Falcon cybersecurity platform is cloud-native and adaptable. And customers love it, judging by its massive growth and fantastic retention rates.
Five years ago, CrowdStrike was a fledgling company with 1,242 customers and $141 million in annual recurring revenue (ARR). These figures exploded to 19,686 and $2.14 billion, respectively, as of Q2 of fiscal 2023, as shown below.
Data source: CrowdStrike. Chart by author.
CrowdStrike reports a 98% gross retention rate and over 120% net retention rate. This means they lose very few customers, and their existing customers spend more money on its products over time.
Unlike Arista, CrowdStrike is not yet GAAP profitable, making it a pure growth play. However, its 30% free-cash-flow margin garnered $442 million in fiscal 2022 (ended Jan. 31, 2022) and another $293 million in the first half of fiscal 2023.
The stock price has fallen considerably recently, now trading at a lower price-to-sales (P/S) ratio than before the pandemic. This could be an opportunity for long-term investors to capitalize on negative short-term sentiment.
3. The Trade Desk advertises the future
I doubt any of us like advertisements, but the media content delivery model predominantly relies on ads to fund its operations. Even Netflix, which funded itself for years through a subscription model, has now begun offering a lower-priced subscription with ads to help fund its operations. If we have to watch them, somebody's likely profiting from them.
One of those somebodies is The Trade Desk, whose demand-side platform offers advertisers and agencies oodles of targeted ad opportunities daily. The company doesn't replace ad agencies; it works with them to improve performance. Connected television (CTV) is a massive growth area, and The Trade Desk reaches 90 million households and 120 million devices. The company also partners with mega-retailers like Walmart to support retail marketing.
The Trade Desk is a nice mix of profits and growth. It grew revenue by 43% last year and 36% through Q3 this year and has been profitable since 2013. Advertising revenue growth could slow in a recession, but The Trade Desk weathered this storm in the pandemic and is confident it will do the same now. Shares trade at a P/S ratio lower than before the pandemic, just like CrowdStrike. And just like CrowdStrike, business is thriving.
These three cloud companies have fantastic potential and look great in a long-term investor's growth portfolio.
