Undoubtedly, 2022 was a year to forget for most technology stocks. But rather than pile into the energy and industrial stocks that have gotten popular, consider beaten-down technology stocks that will likely produce stellar returns from their current prices.
That's right; sometimes, you should skate to where the puck will be, not where it is now. Markets typically have cycles, and the rising interest rates and threats of a recession that have fueled the decline in these stocks will eventually subside. Many excellent technology stocks are begging to be bought; Alphabet (GOOG 1.25%) (GOOGL 1.27%), Adobe (ADBE 1.29%), and CrowdStrike Holdings (CRWD 3.63%) are three examples that could be among the market leaders in 2023.
Alphabet could be a big winner in 2023, particularly if the U.S. economy bounces back
Jake Lerch (Alphabet): Buying $10,000 worth of Alphabet on March 13, 2020, took some guts. The COVID-19 pandemic was in its opening stages; the stock market was in turmoil. Yet, those who did it have been handsomely rewarded. That $10,000 invested in Alphabet shares on that day would have grown to $15,790 today -- a healthy 58% return.
So, what if I told you that -- on a relative valuation basis -- Alphabet shares are even cheaper today than they were in March 2020? As the charts below illustrate, Alphabet shares are plumbing depths not seen often -- if ever -- in the last decade.
GOOG PE Ratio data by YCharts
Yet, despite the below-average valuation, the majority of Alphabet's fundamentals remain rock-solid. The company has $116 billion in cash on its balance sheet -- roughly equivalent to the entire market cap of Advanced Micro Devices. What's more, Alphabet has generated $92.8 billion of operating cash flow in just the last 12 months. The operating margin is off its highs, but it's still a very respectable 28%.
Some of Alphabet's signature brands, such as Google Search and YouTube, own significant market share in the internet search and internet video sector. Moreover, YouTube will benefit (along with Meta Platforms and Snap) if the U.S. passes legislation that limits or even bans the use of DanceByte's TikTok app.
And while a ban of TikTok would be a great catalyst for Alphabet, an even better one would be a healthier global economy. That would lead to increased ad revenue, which is Alphabet's bread and butter. I think it can happen. Which is why, for me, Alphabet stock is primed to deliver big returns in 2023 -- and beyond.
A multiyear bargain on this leading software stock
Justin Pope (Adobe): Creative software company Adobe has steadily grown and evolved into one of the world's largest software companies today. Its legacy product, Adobe Acrobat, goes back to the early 1990s, but today Adobe offers three core pillars of products, including Creative Cloud, Document Cloud, and Experience Cloud. Adobe used to sell its products as licenses, which someone could pay for once and own forever. About a decade ago, Adobe shifted to a software-as-a-service model, where customers pay monthly for product access.
This pivot changed the trajectory of Adobe, which has grown immensely over the decade since. You can see below how smooth Adobe's growth has been and how profitable it's become; Adobe generates $0.41 of cash profit for every sales dollar it brings in:
ADBE Revenue (TTM) data by YCharts
Meanwhile, Adobe's outlook seems bright; analysts believe its earnings per share (EPS) will average 13% annual growth over the next three to five years. Additionally, Adobe is working through a pending acquisition of a web-based creative platform called Figma for $20 billion. Figma was becoming increasingly popular, and acquiring it could help Adobe evolve again -- into a platform for digital creation.
Adobe's stock has taken a beating in this bear market despite stellar operating results, which only sets up patient investors for potentially significant returns over the long term. The stock's free cash flow yield is 4.4% today, its highest since 2014. In other words, investors are getting better value on Adobe's cash profits than they have in years.
Secure networks could mean secured gains in this company
Will Healy (CrowdStrike): Neither a bear market nor economic uncertainty has stopped growth in cloud adoption. As businesses work to increase their IT platforms' efficiency, the cloud's value proposition endures even in a slower economy.
However, one ongoing concern is cloud security. Cloud-based systems face more points of vulnerability than an in-house server. This is where CrowdStrike can help. Its software protects the most vulnerable points of a cloud-based network, namely the endpoints, identities, data, and workloads.
Additionally, rather than reacting to security threats as they arise, CrowdStrike's software anticipates attacks, addressing those issues before they threaten platforms.
That approach helped it attract $1.6 billion in revenue for the first three quarters of fiscal 2023 (the period ended Oct. 31), rising 57% versus the same time frame in fiscal 2022. And while it still loses money on an unadjusted basis, it reported $257 million, or $1.07 per share, in adjusted earnings in the first nine months of fiscal 2023, 184% more than in the year-ago period.
Analysts estimate that CrowdStrike will end the fiscal year with $1.50 per share in adjusted earnings, a figure forecast to rise to $1.99 per share in fiscal 2024. Although that represents some inevitable slowing, the 33% earnings-per-share growth should stand out in the current economy.
Moreover, that slowing appears priced in to the stock. CrowdStrike lost most of its value after peaking at its all-time high in November 2021. But that also means that a price-to-sales (P/S) ratio that once exceeded 50 has now fallen to 14, a level near its record low valuation in March 2020. Such a position could serve as a floor that might persuade investors to buy hand over fist.
