Wins have been hard to come by for technology investors in 2022. A combination of high inflation, rising interest rates, additional macroeconomic headwinds, and company-specific pressures have combined to crush valuations for growth-dependent companies in the sector, but there are some silver linings to the otherwise challenging backdrop.
This year's massive valuation pullback for growth stocks has pushed prices for some very promising tech companies down to attractive levels. Read on to see why a duo of Motley Fool contributors has identified these tech leaders as two of the best beaten-down stocks to buy right now.
1. Cloudflare
Keith Noonan: Cloudflare (NET -1.05%) provides content-delivery-network (CDN) technologies, protection against distributed-denial-of-service (DDoS) attacks, and other cloud-based web services -- and it's arguably one of the most important companies of the Internet Age. Cloudflare's DDoS-protection technologies prevent bad actors from flooding websites and applications with waves of service requests that could take them offline. Meanwhile, its CDN software can speed up the rate at which information is transferred and made accessible around the world. Essentially, the company's cloud-based software offerings make it possible for much of the modern internet to function efficiently, and demand for these services has been translating to strong sales growth.
Cloudflare's revenue grew roughly 47% year over year in the third quarter to reach $253.9 million, and the company posted a non-GAAP (adjusted) gross margin of roughly 78% in the period. Even as macroeconomic conditions have become less favorable, Cloudflare has continued to grow revenue at an encouraging clip, and its long-term expansion outlook remains promising even if the economic environment continues to weaken in the near term.
Valued at approximately 17 times this year's expected sales, it's admittedly fair to say that the company doesn't look cheap by most conventional metrics. Even after falling roughly 61% year to date and 77% from its peak, Cloudflare still has a highly forward-looking valuation, but this is a case where strong growth actually looks like a pretty reliable bet.
Cloudflare is a company that's built for the long term. The business is growing sales at a rapid rate despite headwinds and tough bases of comparison, it's posting strong gross margins, and it's already recording positive non-GAAP (adjusted) free cash flow and net income. With its highly scalable software offerings, an attractive long-term demand outlook, and an encouraging margins picture, I think Cloudflare is poised to deliver big wins for patient investors.
2. Meta Platforms
Parkev Tatevosian: Meta Platforms (META -10.56%) has been facing multiple headwinds simultaneously, and the stock is now down roughly 69% from its peak. Apple's (AAPL 0.52%) privacy policy changes made it harder for Meta to sell targeted advertising. Meanwhile, TikTok's popular short video format has forced Meta to transition its service to accommodate the change in people's tastes. As if that wasn't enough, marketers have turned cautious and reduced spending as the war in Ukraine and slowing economic growth clouded visibility.
Amid those challenges, it can be easy to forget that Meta boasts 2.9 billion daily active users across its family of apps. Meta's platforms are free to use. The company makes money by showing advertisements to those browsing the app. Of course, advertisers' willingness to spend on your platform increases with the total number of users. Meta's scale has helped boost revenue from $5.1 billion in 2012 to $118 billion in 2021.
META PE Ratio data by YCharts.
More importantly, Meta has reached excellent economies of scale, with its operating income exploding from $538 million to $46.7 billion in that same time. Admittedly, the near-term challenges may persist well into 2023 for Meta. The company may never return to the explosive growth rate of the last decade. Still, trading at a price-to-earnings of 11 and a price-to-free cash flow of 12, Meta's stock price has arguably overreacted to the challenges in the short term. That's opened an opportunity for long-term investors to scoop up shares of this stock at bargain valuations.
Investors can profit off the tough climate for growth stocks
While this year has generally been very challenging for technology and growth investors, the difficult conditions won't last forever. Big sell-offs have created opportunities to build positions in some category-leading companies at discounts that open the door for impressive long-term returns, and Cloudflare and Meta Platforms are two stocks that look attractively valued at current prices. Macroeconomic trends and business-specific developments may lead to more volatility in the near term, but there's a good chance that investors taking a buy-and-hold approach with these companies will see strong returns.
