One could argue that Nvidia (NVDA 5.57%), Global-e Online (GLBE 3.69%), Cadence Design Systems (CDNS 3.61%), and CrowdStrike (CRWD 2.17%) make great dollar-cost-averaging buys regardless of valuation, thanks to their incredible businesses. However, with each stock sporting a price-to-sales (P/S) ratio of 12 or more, they will not show up in anyone's value stock screeners anytime soon.
Adhering to the axiom that "premium businesses trade at premium valuations," investors may be wise to put these surefire stocks on a bear market watch list, where they can capitalize on more attractive prices.
With that said, let's find out what makes these stocks worthy of their lofty valuations and see why they are great buy candidates in any upcoming bear market.
1. Nvidia
While Nvidia and its full-stack accelerated computing platform are technologically overwhelming to most, the megatrends supporting its bull case are much more straightforward.
First, Nvidia's core data centers and gaming markets, which accounted for 51% and 38% of sales in the first half of 2023, should continue booming over the next decade. Though the company's gaming unit saw sales drop by 51% in the third quarter compared to the prior year, it boasts 200 million gamers on its GE Force platform.
Hurt by its customers lightening their inventory after the pandemic boom, the segment should return to growth over the next several quarters as the gaming industry continues its transition to the cloud.
Meanwhile, its data center unit grew sales by 31% in Q3 and looks superbly positioned to thrive alongside the rise of artificial intelligence AI. For example, as the hype around ChatGPT persists, it is worth remembering that thousands of Nvidia's graphics processing units (GPUs) trained its models.
Additionally, the company averaged a return on invested capital (ROIC) of 22% over the last decade. ROIC measures a stock's profitability compared to its debt and equity, with a mark above 20% considered outstanding.
As stocks with higher ROICs are historically proven to beat their peers, Nvidia's profitability and growth prospects make it a great business to consider at a discount in the event of a bear market.
2. Global-e Online
Helping its customers "go global and be local," Global-e Online enables cross-border, direct-to-consumer (DTC) sales for its merchants worldwide. Supporting over 30 languages, 100 currencies, and 150 payment methods, Global-e boosts its merchants' international conversion rates through the low-friction shopping experience provided by its platform.
Supporting localized pricing, duties and taxes, shipping options, and even various after-sale processes, the company tackles the complexities of international sales for its merchants.
Behemoths like Walt Disney, LVMH Moet Hennessy Louis Vuitton, and Mattel have turned to Global-e to help their global expansion. Not to mention that Shopify and Global-e partnered in 2021 to make the latter the exclusive cross-border services provider for the e-commerce juggernaut's growing list of merchants.
Growing sales and gross profit by 79% and 92%, respectively, in Q3, Global-e is already in hypergrowth mode, despite the Shopify integration launching in totality over the coming quarters.
Ultimately, Global-e Online's niche of battling the mundane intricacies of global sales gives it a unique moat as it grows, doing something no other companies want to or can do. As this moat continues to widen over time, investors would be wise to consider scooping up shares of Global-e if lower prices appear.
3. Cadence Design Systems
Like Nvidia, Cadence Design Systems may not be for the technologically faint of heart. Offering software, services, and intellectual property-based (IP) products, Cadence helps its customers design, assemble, examine, and verify integrated circuits (ICs), chips, and electronic systems.
In simplest terms, the company's products are critical to designing semiconductors and advanced electronics almost everywhere in today's world. For example, each of the top 20 semiconductor companies in the world uses its digital design and signoff software.
Whether simulating models of ICs, converting designs over to manufacturing, or offering its IP to speed up development and reduce errors, Cadence should thrive as the world becomes more technologically focused. Best yet for investors -- and again, like Nvidia -- Cadence does it all with a stellar ROIC of 26%.
Helping to drive this strong ROIC is the company's strong recurring revenue base, which generally accounts for 85% to 90% of sales. These repeating sales create one thing that the stock market loves: predictability, which may help explain why Cadence trades at 50 times free cash flow (FCF).
CDNS Price to Free Cash Flow data by YCharts
This combination of Cadence's importance to the semiconductor industry and its steep valuation makes it a perfect candidate to add to a bear market watch list waiting for lower prices.
4. CrowdStrike
Led by its Falcon platform, CrowdStrike's cloud-native cybersecurity operations offer investors the allure of robust network effects. As trillions of data points are fed into CrowdStrike's security cloud, its AI-powered threat detection grows stronger, protecting its customers across all endpoints.
The more customers using the company's cybersecurity platform, the stronger its network grows, creating a virtuous cycle for CrowdStrike, its customers, and investors. Perhaps thanks to this network effect, the company now counts 258 of the Fortune 500 as customers.
While all of the company's operations are available on one agent (specialized software component), it lets customers choose from 23 specific Falcon cloud modules to address their cybersecurity needs. As of its most recent quarter, 60% of CrowdStrike's customers used five or more modules, and 21% deployed seven or more.
Despite posting 700% revenue growth since its initial public offering in 2019, the company is already FCF-positive -- even after subtracting stock-based compensation.
With operations so essential to corporations' safety, CrowdStrike won't be a value stock soon. However, its incredible growth, burgeoning network effects, and steady cash generation so early in its company lifecycle make it an excellent business to consider on the next dip.
