After more than a year in the wilderness, tech stocks are hot once again. Many technology names have already seen their stock prices mushroom by more than 25% year to date.
So, let's look at three such recovering tech stocks that these three investors would still buy without hesitation: Airbnb (ABNB -0.57%), Sea Limited (SE -0.67%), and Twilio (TWLO -2.42%).
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2023 could be the year Airbnb's stock truly takes flight
Jake Lerch (Airbnb): Short term rental operator Airbnb has weathered a fierce storm over the last few years. It faced an existential crisis due to pandemic-era travel restrictions in 2020 and 2021. Then, last year, it faced macroeconomic headwinds ranging from high inflation to a strong U.S. dollar.
Nevertheless, the company's fundamentals have not only held up, they've improved. Airbnb reported fantastic third-quarter results in November 2022. Revenue grew to $2.9 billion and net income widened to $1.2 billion. Both figures were record highs for the company. Similarly, free cash flow reached $960 million for the quarter and $3.3 billion over the trailing 12 months.
Even so, Airbnb's stock price seems entirely divorced from these impressive business fundamentals or, at any rate, it seems unmoved by them. Shares remain 50% off their all-time high of $216.84 in February 2021.
There are, however, reasons for optimism. With inflation cooling, growth stocks have rallied, and so has Airbnb. The stock is up 33% year to date. What's more, some of the macro headwinds the company faced in 2022 turned to tailwinds in 2023. The U.S. dollar, for example, has weakened.
As a result, analysts have begun to raise Airbnb's revenue and earnings estimates for 2023. The consensus estimate for full-year 2023 earnings per share is now $2.81, up from $2.63 only three months ago.
Airbnb reports earnings results in mid-February. I think it will be another solid quarter, which should kick off a long-lasting bull run for Airbnb.
The conglomerate that can prosper now that it knows its "limits"
Will Healy (Sea Limited): Sea Limited became a pandemic darling as consumers in its core Southeast Asian markets and elsewhere flocked to its gaming, e-commerce, and fintech applications. Its Free Fire was the most downloaded game in 2019, 2020, and 2021. Also, Sea Money, its emerging fintech segment, continued to post triple-digit revenue growth. Those fintech capabilities likely helped its e-commerce arm Shopee, whose success in Southeast Asia inspired market launches in Europe and Latin America.
However, this expansion brought continuing losses, and a struggling economy led to embarrassing withdrawals from countries like India, France, and Argentina, in some cases just months after launching its sales sites in these countries. Amid the losses and retrenchment, Sea Limited stock lost nearly 90% of its value over a 13-month period.
But those failures made Sea more "limited" in a way that is likely helpful. Shopee has pivoted its emphasis back to its home region of Southeast Asia. Moreover, the company shifted its financial focus to turning profitable in the near term.
These new approaches may have started to bear fruit. In the first nine months of 2022, Sea's revenue of $9 billion rose 34% compared to the same period in 2021. And although its nine-month losses rose to $2 billion, Sea Limited's Q3 loss of $571 million fell slightly from year-ago levels.
Investors appear to have responded well to its cost-cutting initiatives. Sea's stock rose almost 60% from the November low. Moreover, its price-to-sales ratio is now 3, well under the record P/S ratio above 30 in early 2021.
If Sea Limited can stay on this growth trajectory and make more strides toward turning profitable, the supercharged growth stock could eventually surge above its 2021 high and beyond.
Twilio's been unfairly punished by an irrational market
Justin Pope (Twilio): Markets can be irrational. They can create bubbles when too optimistic and sell stocks six feet under when investors get fearful. Twilio's a prime example; its price-to-sales ratio (P/S) has fallen to 3, its lowest as a public company (aside from recent lows) by a wide margin. However, Twilio kept growing the whole time, generating more than $3.6 billion in revenue over the past four quarters.
So what's Wall Street's beef with Twilio? The chart shows that it's burning more cash than ever, a fair point given that a company ideally moves toward turning a profit as it grows. But look closer for the context. The company has upped its growth investments, including product development of Flex and Engage, and acquired Segment two years ago for $3.2 billion in stock.
Flex lets enterprises build cloud-based contact centers, while Engage collects first-party customer data for customized marketing efforts. All of this works around Twilio's existing cloud communications product. Over the long term, Twilio could transform its core programmable communications tools to a full stack that companies use to engage with customers.
TWLO PS Ratio data by YCharts
In the meantime, you probably shouldn't fret about Twilio's cash burn when there's $3.2 billion in net cash on the books, enough to fund the past year's losses 10 times over. Additionally, management is guiding for non-GAAP operating profit this year.
Sentiment can be powerful; it's just worked against Twilio for the past year. Investors could be in for a fun ride if sentiment flips to the positive.
