Benjamin Franklin once said that "an investment in knowledge pays the interest." These were wise words, because nothing will pay off more than educating ourselves on the market and individual companies.
Let's start with a couple of general facts about the market:
- The vast majority of investors underperform the market by trying to time it.
- The market's very best days typically happen within a few weeks of the market's worst days -- when we would least expect them. Missing these days is disastrous for long-term returns, according to a JPMorgan Chase study.
- According to years of data, staying invested and consistently investing new money is best. A monthly 401(k) withholding or another budgeted amount is a terrific tool.
Peter Lynch, one of the most revered investors ever, says, "Know what you own, and know why you own it."
With this in mind, let's get to know Amazon (AMZN 3.43%), Adobe (ADBE 0.87%), Palo Alto (PANW 0.91%), and Cloudflare (NET 1.44%).
1. Three simple reasons to love Amazon stock
Amazon was flying high in 2020 and 2021 due to a boost from the pandemic's push to online shopping. That all changed this year when an unusual economic downturn conspired to crumple its profits. An extremely tight labor market and logistical snarls raised costs by billions of dollars, and now inflation and a strong dollar are wreaking havoc.
As the chart shows, the stock price is down 45% this year, marking the stock's most significant drawdown since the Great Recession.
All these headwinds above have two things in common: They're frustrating, but they are short-term. For investors looking long-term, here are three reasons for optimism:
- Amazon has a stranglehold on the U.S. online retail market, with a 38% market share, according to Statista (some sources even suggest the share tops 50%). Walmart occupies a distant second place at just 6%. Even better, only 15% of U.S. retail sales are online now, so the growth potential is enormous.
US E-Commerce Sales as Percent of Retail Sales data by YCharts
Statista estimates that the $900 billion U.S. retail e-commerce market in 2022 will reach $1.7 trillion in five years. - Amazon Web Services (AWS) enjoys a 34% market share in the hypergrowth cloud computing industry, far outpacing rivals Microsoft and Alphabet -- Microsoft Azure holds 21% and Google Cloud 10%. AWS sales are up 32% year over year through Q3, with a run rate of over $80 billion, and the segment is extremely profitable, with a 30% operating margin.
- Then there's everything else. Amazon's advertising business is up 22% in 2022, reaching $26 billion in sales, there are 200 million Amazon Prime members globally, and broadcasting NFL Thursday Night Football draws millions of viewers each week.
Amazon's results could be weak for a few more quarters as the economy struggles, but the long-term business is compelling.
2. Adobe stock is priced to move
Adobe's products are relied upon by millions of businesses and creative professionals every day. In fact, a staggering 400 billion PDFs were opened last year. The company posted another record quarter in Q3, with $4.43 billion in sales on 15% year-over-year growth, and it's highly profitable, with a 45% non-GAAP operating margin this year.
The stock is down 50% over the past year. The war in Ukraine, foreign currency losses, and a likely upcoming recession are expected to eat into short-term results. Investors are also unhappy about the $20 billion acquisition of Figma, a competitor with a heralded collaborative design software. Analysts rushed to downgrade the stock after the announcement, but they missed the forest for the trees, as I explain in detail here and here.
The downgrades also come with the stock already in the bargain bin, which sounds suspiciously like a classic buy-high, sell-low blunder. As the chart shows, Adobe is now historically undervalued by several metrics.
ADBE PE Ratio data by YCharts
Investors have a choice: follow the analysts and sell while the stock is historically undervalued, or invest long-term in an excellent company while it is on sale.
3. Palo Alto keeps on rolling
Cybersecurity is a critical front in a battle fought every day by businesses, governments, and infrastructure services, and Palo Alto Networks is on the front lines. The company provides network, cloud, and operations security services. As cybersecurity needs changed over the past several years, Palo Alto transformed itself, going from a next-gen firewall supplier to a leader in 11 security categories.
Fiscal 2022 was a booming success, as revenue reached $5.5 billion with 29% growth. Even better, growth accelerated over fiscal 2020 (18%) and fiscal 2021 (25%). The remaining performance obligation, which represents revenue to be recognized in the future, jumped 40% to $8.2 billion, suggesting that robust growth will continue.
Palo Alto achieved GAAP profitability in fiscal 2022 and generated $485 million in adjusted free cash flow. The stock price is down 10% this year but could continue its market-beating performance long-term as cybersecurity needs continue to grow.
4. Cloudflare stock looks tempting, trading down 75%
Networking is challenging these days because of the sheer amount of data we need to transmit -- even data can only move so far, so fast. Cloudflare, a network-as-a-service (NaaS) provider, increases speed, reliability, and security with data centers near 275 cities worldwide.
There's a ton to like about Cloudflare's financials, including over 50% compound annual revenue growth since 2016, forecast to reach $974 million in fiscal 2022, and a 76% gross margin. The company also has credibility, with 29% of the Fortune 1000 as customers.
What's the catch? Prior to this year, Cloudflare's valuation was off the charts, reaching a high of over 100x sales. The 75% price drop over the past year now puts its price-to-sales (P/S) ratio near 17, in line with other growth tech companies like CrowdStrike and Zscaler. This drop may be the opportunity patient investors have waited for.
With the economy in a rough patch and the market volatile, it's a great time to peruse the market for bargains. With bright futures, these four companies are excellent additions to a growth investor's watch list.
