What a difference a year can make. After growth stocks were Wall Street's savior in 2021, they were primarily responsible for dragging the major indexes into a bear market last year. The growth-dependent Nasdaq Composite and Nasdaq 100 -- an index comprised of the 100 largest nonfinancial companies listed on the Nasdaq exchange -- each plunged 33% in 2022.
Thankfully, when there's pain on Wall Street, you can always find opportunity. You see, every double-digit percentage decline in the major stock indexes throughout history has eventually given way to new all-time highs, courtesy of a bull market rally. It means every sizable pullback is a buying opportunity if you're a long-term investor.
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The current bear market is home to a number of amazing deals, some of which can be found in the beaten-down Nasdaq 100. What follows are three Nasdaq 100 stocks you can confidently buy hand over fist in February.
Palo Alto Networks
The first Nasdaq 100 stock that stands out as a screaming buy in February is cybersecurity company Palo Alto Networks (PANW 0.11%). Despite the poor investor sentiment that often accompanies bear markets, Palo Alto has had no trouble executing on its multiyear operating transformation that's really beginning to pay dividends.
A little over four years ago, Palo Alto Networks' management team made the decision to shift the company's focus to software-as-a-service (SaaS) cybersecurity solutions. Even though Palo Alto still sells physical firewall products, the percentage of total sales derived from subscriptions and support services has jumped to 78.9%, as of the October-ended quarter. That's up from 61.3% of net sales, as of the end of fiscal 2018 (July 31, 2018).
The reason for this switch is threefold. To begin with, cloud-based SaaS cybersecurity solutions are far nimbler than physical firewall products, which should allow for superior user protection. Secondly, cloud-based subscriptions tend to generate better margins than physical firewall products and are more likely to help with customer retention. And lastly, cloud-based SaaS gives Palo Alto an opportunity to vastly expand its addressable market.
A quick glimpse at the company's operating performance clearly shows this strategic shift is paying off. Annual recurring revenue from these next-generation security solutions soared 67% in the October-ended quarter to $2.11 billion. Meanwhile, remaining performance obligations -- i.e., the company's backlog of projects/orders -- sat at $8.3 billion, which was a 38% improvement from the prior-year period.
If this stellar growth rate isn't convincing enough, consider that management hasn't been afraid to make multiple bolt-on acquisitions. These smaller deals have helped the company expand its product and service ecosystem, as well as provided cross-selling opportunities that have encouraged Prisma Cloud customers to purchase multiple cloud module subscriptions.
With businesses shifting their data online and into the cloud at an accelerated pace in the wake of the pandemic, Palo Alto Networks appears perfectly positioned to capitalize on this trend.
Vertex Pharmaceuticals
A second Nasdaq 100 stock that's begging to be bought in February is biotech stock Vertex Pharmaceuticals (VRTX -1.02%). In spite of growing recession fears in the U.S., Vertex has a laundry list of catalysts that can buoy its share price and substantially lift its valuation over the long run.
The first thing to note about healthcare stocks, in general, is that they're incredibly defensive. It doesn't really matter how poorly the U.S. economy and/or stock market perform -- people still need prescription drugs, medical devices, and various healthcare services. In other words, a recession wouldn't reduce demand for Vertex's brand-name therapeutics.
Where this company has really made its presence known is in treating people with cystic fibrosis (CF), a genetic disease characterized by thick mucus production that can obstruct a patient's lungs and/or pancreas. Vertex has developed four generations of U.S. Food and Drug Administration-approved therapies designed to improve lung function for CF patients. The latest of these treatments, Trikafta, is pacing more than $8 billion in annual run-rate sales and targets the most-common genetic mutation (f508del), which is found in about 90% of all CF patients.
Vertex's incredible cash flow from CF is pretty much unchallenged at the moment. It's working on a fifth-generation CF treatment combination treatment, and has the opportunity to expand Trikafta's label to include children aged 2 to 5 following a successful phase 3 trial. CF can be a sustainable $10 billion-plus annual sales opportunity for the company.
Vertex Pharmaceuticals is looking to make waves beyond CF, too. It's undertaken a number of collaborations and development partnerships, and is working on novel therapies that can treat pain, type 1 diabetes, transfusion-dependent beta thalassemia, and sickle cell disease. If Vertex can expand its approved drug portfolio beyond one area of focus, a higher earnings multiple (currently 19 times Wall Street's estimated 2023 earnings), for a company with eight consecutive years of double-digit sales growth, could follow.
Lastly, Vertex ended September with a veritable treasure chest of $9.77 billion in cash, cash equivalents, and marketable securities. This is more than enough capital to further its internal research, strike up new collaborations, and potentially even make acquisitions.
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PayPal Holdings
The third Nasdaq 100 stock to buy hand over fist in February is none other than fintech giant PayPal Holdings (PYPL 0.64%). Although historically high inflation threatens to reduce the discretionary purchasing power of low-earning workers, PayPal's digital payment networks have demonstrated incredible operating resilience.
While every next-big-thing investment is going to have its ups and downs, it's important to recognize how much of an opportunity fintech solutions are this decade. A July report issued by Grand View Research estimated the fintech-as-a-service market would be worth roughly $950 billion by 2030, which equates to a 17.2% compound annual growth rate, beginning in 2022. PayPal has a really good chance to be the No. 1 player in this fast-growing space.
A couple of PayPal's key performance metrics give away just how incredible this growth opportunity could be for the company. Despite U.S. gross domestic product declining during the first half of 2022, total payment volume (TPV) on the company's digital networks jumped 14% (excluding currency movements) to $337 billion in the third quarter. Yes, inflation likely aided this growth to some extent. However, sustained double-digit TPV growth with the U.S. economy contracting demonstrates just how powerful digital transactions are as a growth trend.
Furthermore, PayPal's active accounts are more engaged than ever. As I've driven home multiple times before, the average active account completed 50.1 transactions over the trailing-12-month (TTM) period, ended Sept. 30, 2022. That compares to an average of 40.1 transactions over the TTM for active accounts when 2020 ended. Since this is a usage-based operating model, more transactions should boost the company's gross profit.
In 2023, PayPal and its management team will be focused on running the company more efficiently and rewarding shareholders. In particular, CEO Dan Schulman is targeting at least $1.3 billion in annual cost reductions. Further, the company announced an up to $15 billion share buyback program last summer. Buybacks have the potential to lower a company's outstanding share count and lift earnings per share.
Considering PayPal's successful track record of growth and its resilient performance indicators, its current multiple of 18 times Wall Street's forecast earnings for 2023 looks incredibly cheap.
