Technology keeps the heart of our modern economy pumping and has, in many ways, become indispensable. It powers our automobiles, medical care, mobile devices, homes, workplaces, and more.
The world saw some solid evidence of when many tech stocks boomed at the start of the pandemic. That boom resulted in some market overenthusiasm about how tech adapted to the pandemic situation. Low interest rates also played a part, encouraging excess borrowing to fuel growth that outpaced long-term demand. The overenthusiasm resulted in a lot of tech stock growth being pulled forward.
As pandemic worries eased in late 2021 and into 2022, tech stocks came back down to Earth as these companies couldn't match those elevated growth levels. The resulting drop in tech stock prices in 2022 means 2023 could be an excellent opportunity for long-term investors looking for bargains.
Some of the best bargains out there are for tech stocks flying a bit under the radar right now. Analog Devices (ADI 0.73%), Cloudflare (NET -1.05%), and CrowdStrike (CRWD 0.13%) are three terrific examples. Let's find out a bit more about these three under-the-radar stocks.
1. Analog Devices: A semiconductor stock many investors forget about
We use analog semiconductors all day even if we aren't aware of them. They help vehicles and smartphones operate. They are also in medical devices, industrial machines, data centers, satellites, and lots more. Analog chips measure real-world data (like temperature, speed, and sound) so it can be communicated digitally.
Analog Devices is one of the semiconductor industry's leading companies, but many investors don't know about it. It generated $12 billion in revenue in fiscal 2022 (ended Oct. 29, 2022) which was up 64% from 2021. It also managed $3.3 billion in operating income (94% growth), and $3.8 billion in free cash flow. Analog Devices doesn't have the same volatility as many of the more popular chip companies since its revenue is diversified and not super dependent on consumer electronics, as shown below.
Data source: ADI. Chart by author. The sum of the individual percentages may not equal 100% due to rounding.
Also on offer with Analog Devices stock is a growing dividend and share-buyback program. Analog Devices has a free-cash-flow margin of 31% and management has pledged to return 100% of this cash to shareholders. The company bought back an impressive $3.1 billion in stock and paid out $1.5 billion in dividends in fiscal 2022. The dividend currently yields just under 2%, and the dividend payout has risen in each of the past 19 years.
As the world becomes more connected, the demand for analog chips will continue to rise. Analog Devices would be an excellent choice for dividend-growth investors.
2. Cloudflare: Innovation for growth investors
Websites and cloud-based applications need to function quickly and reliably. Lag and downtime mean lost money for companies. This is why Cloudflare has developed a global network of data centers serving 95% of the global population with lightning-speed connections to data. This network replaces cumbersome on-premises server boxes, as it is cloud-based.
It seems everyone is talking about Artificial Intelligence (AI) these days and for a good reason. AI applications will use oodles of data and benefit from a network like Cloudflare's, creating another tremendous growth proposition. This is why Cloudflare and Nvidia are partnering to bring Nvidia AI-supported application frameworks to Cloudflare's network.
On the financial side, Cloudflare sales reached $975 million in 2022 on 49% growth, and management expects at least a 36% increase to $1.33 billion in 2023. Cloudflare has a gross margin topping 75%, which suggests it can be quite profitable at scale. However, it isn't there yet. The company has a ways to go before achieving generally accepted accounting principles (GAAP) profitability, so the stock is most appropriate for long-term investors with at least moderate risk tolerance.
Cloudflare stock is currently trading down more than 50% from its 52-week high. It trades at a price-to-sales (P/S) ratio similar to before the pandemic, so intrepid investors should put this innovative company on their watch list now.
3. CrowdStrike: Cybersecurity is paramount
Our technology would be of little use without protection from bad actors. Companies must be vigilant against breaches and protect endpoints. This is even more critical with remote workforces and the reliance upon the cloud. CrowdStrike's mission is to do just that. The company was immensely popular in the tech run-up of 2020 to 2021 but has since gone undercover for many investors. It's time to take another look.
While the stock price is down more than 50% from its 52-week high, the company's results are fantastic.
It boasts a customer base that includes more than half the Fortune 500 companies and more than 25% of the Global 2000. Its customer growth is phenomenal, as shown below.
Data source: CrowdStrike. Chart by author.
The influx of customers helped CrowdStike prolifically grow annual recurring revenue (ARR), which hit $2.3 billion on 54% year-over-year growth in the third quarter of fiscal 2023 (ended Oct. 31, 2022). It produces gobs of free cash flow to boot: $467 million through Q3 of fiscal 2023 on top of $442 million in fiscal 2022.
Tech stocks have taken a beating as businesses look to scale back spending. However, cybersecurity is one area companies cannot afford to scrimp on. This could make the industry much more durable during a potential recession. CrowdStrike's results speak volumes, and investors are starting to listen again.
