Last year was a stinker for the stock market, and tech stocks were some of the worst performers. Numerous stocks within the sector finished 2022 down more than 50%.
However, investors need to remember that it's rare for the U.S. stock market to decline in back-to-back years. What's more, almost everyone expects a rebound to happen sooner or later -- it's just a matter of when.
So when that inevitable rally does occur, which tech sector names will lead the way higher? Three Motley Fool contributors have singled out DocuSign (DOCU +2.67%), Amazon (AMZN +3.49%), and Meta Platforms (META +2.48%) as prime candidates for comebacks.
Image source: Getty Images.
A pandemic darling poised to bounce back after a challenging 2022
Jake Lerch (DocuSign): DocuSign really took it on the chin in 2022. Its shares lost 64% of their value last year as the company faced numerous challenges.
NASDAQ: DOCU
Key Data Points
As the Federal Reserve hiked interest rates, growth stocks lost much of their appeal, and DocuSign plummeted. A run of disappointing quarterly results led to the ouster of CEO Dan Springer in June. Since then, the company's share price has stabilized, but it remains 81% below its all-time high. So, why should investors think DocuSign can get its mojo back?
Well, for starters, the company's product is everywhere. Millions of people became quite familiar with DocuSign during the pandemic as in-person activities were reduced to a bare minimum. However, even now that social distancing is largely over, DocuSign remains a go-to solution for signing paperwork.
As a personal example, I've signed mortgage, auto, and insurance paperwork in the last two months -- each time using DocuSign. But you don't have to take my anecdotal word for it. Just look at the company's financials.
Its trailing 12-month revenue is $2.4 billion, up a respectable 18% year over year. True, the company is no longer growing at the astronomical 50%-plus rate it experienced in the heart of the pandemic -- but those growth rates were never going to be sustainable in the long run.
And while those sky-high growth rates are now in the past, so too are the company's inflated valuation metrics. DocuSign's forward price-to-earnings multiple is now a reasonable 30, down from the frothy 150 multiple it was trading at in the summer of 2021.
Data by YCharts.
Meanwhile, its price-to-sales ratio is a reasonable 4.8, roughly on par with Alphabet (4.1) or Apple (5.4). Contrast that to 2020 when DocuSign was trading at a price-to-sales ratio north of 30.
What's more, the company's future looks bright. While analysts are trimming their earnings estimates for many tech companies, they are raising them for DocuSign. Wall Street now expects it to earn $1.92 per share in its fiscal 2023, up from a consensus forecast of $1.65 per share a month ago. And if its earnings can stage a comeback, I think DocuSign's stock price can too.
AWS will likely drive the recovery for Amazon
Will Healy (Amazon): Amazon has lost approximately half of its value since peaking in 2021, a drop that understandably makes many shareholders uneasy.
Yet this is far from the worst drop the tech company has ever suffered. In 1999, after peaking at a split-adjusted $5.65 per share, it began a steep decline thanks to the dot-com bust, reaching a low of $0.28 per share. That amounted to a 95% drop in less than two years.
And even though it did not surpass that $5.65 per share peak until 2009, Amazon would ultimately prove itself to be a comeback stock and become one of the most valuable companies in the world. It reached a high above $188 per share in 2021 before falling to about $95 per share at the time of this writing.
Secondly, Amazon Web Services (AWS), its cloud computing arm, has prospered even amid the bear market and stock declines.
It's true that e-commerce remains the source of much of its revenue and keeps Amazon at the forefront of the public's consciousness. However, e-commerce has recently become its loss leader amid negative operating margins. And even when Amazon's marketplace was prospering during the most intense phases of the pandemic, the e-commerce segments only posted single-digit percentage operating margins. In contrast, AWS has achieved an operating margin of 30% over the last 12 months.
Moreover, AWS netted about $17.6 billion in operating income in the first nine months of 2022, 33% more than in the same period in 2021. Overall, Amazon's operating income was $9.5 billion in the first three quarters of 2022 -- so AWS's operating income carried the company.
Image source: Synergy Research Group.
Grand View Research forecasts that the cloud will become a $1.55 trillion industry by 2030, implying a compound annual growth rate of 16%. Since AWS holds a market-leading 34% share of the cloud infrastructure market, that expected growth makes Amazon stock a buy, with or without e-commerce.
The worst could be over for this social media giant
Justin Pope (Meta Platforms): Meta Platforms had a year to forget in 2022. Hindered by the user-privacy improvements Apple made to iOS as well as many businesses' shrinking advertising budgets, the social media giant's stock lost a huge chunk of its value. Though it has recovered from the low point it touched last year, the stock remains roughly 65% below its high.
Well, Meta's major apps -- Facebook, Instagram, and WhatsApp -- are still attracting eyeballs. The apps had a combined 2.93 billion daily active users as of the end of the third quarter, and roughly 3.71 billion people use them monthly. The more people you can put advertising in front of, the more money you can make. And Meta's user base isn't declining despite its staggering market penetration. In the third quarter, its user counts grew 4% over the prior year.
Also, Meta's advertising problems aren't unique to it. They are commonly shared among companies that sell ad space, as many brands are tightening their belts in fear of a recession. After all, there isn't much point in marketing your product if people aren't spending money in the first place. For example, Alphabet's YouTube recently logged its first revenue decline since the company began breaking out its numbers. In the advertising space, the tide of spending has gone out, and that has left everyone marooned. When that condition eventually reverses, Meta's business should pick up.
Lastly, the stock is an absolute bargain. It sports a free-cash-flow yield of 7.3%, and remember that Meta is spending heavily on its Reality Labs metaverse unit, which reduces free cash flow. Despite this, Meta's stock is still offering investors considerable cash profits for their money.
Data by YCharts.
There is a lot of negativity around Meta Platforms, but the core business of advertising to an enormous user base remains intact. Even if the company's metaverse efforts ultimately come up short of leadership's grand expectations, the stock could still perform well because Meta's true golden goose is still laying eggs. Unless that changes, it's hard to imagine this stock won't eventually tell its own comeback story.
