With the market still in a volatile state and uncertainty on the horizon due to macroeconomic and geopolitical risk factors, companies with forward-looking valuations are decidedly out of favor right now. But while volatility could continue to be the name of the game in the near term, the current market climate is also offering some attractive deals on stocks for long-term investors.
Turbulent times won't last forever, and some top growth stocks will eventually bounce back and go on to reach new valuation highs. If you're willing to embrace higher levels of risk in pursuit of potentially explosive returns down the line, read on for a look at three tech companies that are worth investing in for the long haul.
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1. Amazon
Trading down roughly 50% from its previous valuation high, Amazon (AMZN -2.73%) stock looks like a great buy for long-term investors at today's prices. Of course, the big valuation pullback hasn't occurred entirely without cause. In addition to rising interest rates generally making investors more cautious, the company's e-commerce business has seen expenses rise and sales growth plummet as pandemic-driven demand has waned. Additionally, growth for the Amazon Web Services (AWS) cloud-infrastructure business has decelerated, and segment margins have fallen.
Amazon remains one of the world's best companies, and the market's focus on near-term challenges facing the business has pushed the company's stock price down to attractive levels.
AMZN PS Ratio (Forward) data by YCharts
Even within the context of the company's recent growth slowdown, Amazon's forward price-to-earnings ratio of roughly 1.7 looks quite low on a historical basis, and there's a very good chance that the business will emerge from its current challenges and get back to posting stronger performance.
While growth for AWS decelerated to 20% year over year in the fourth quarter, down from 28% growth in Q3 and 40% growth in last year's fourth quarter, performance in Q4 looked solid given the macroeconomic challenges at hand. The company remains the leader in public cloud, and demand in this high-margin category should continue climbing through the next decade and beyond even if rates of expansion prove to be somewhat uneven.
Additionally, the overall e-commerce market is still on track for big growth over the long term, and Amazon stands to benefit as it uses artificial intelligence, robotics, and autonomous vehicle technologies to make that side of the business more efficient. And the company proved the strength of its digital ads business in the quarter, with the unit growing sales 19% year over year in the period despite some powerful industry headwinds.
Taking a buy-and-hold approach to Amazon stock at today's prices will likely prove to be a winning move.
2. Cloudflare
Cloudflare (NET -3.03%) is the market's leading provider of protections against distributed-denial-of-service (DDoS) attacks, and it blocked an average of 136 billion individual attack attempts a day in the fourth quarter. The company is also a leading provider of content-delivery-network (CDN) and domain-name-system (DNS) services. With the amount of data housed and transmitted on the internet still growing rapidly, and businesses and organizations increasingly conducting their operations through web-based channels, Cloudflare has seen surging demand for its services.
Cloudflare ended 2022 with sales up 49% on an annual basis, reaching $975.2 million. Even more impressive, the company managed to grow revenue at a 49% compound annual rate over the last five years.
Cloudflare closed out 2022 with 2,042 customers generating at least $100,000 in revenue, up roughly 44% on an annual basis. The company's large-customer cohort has climbed at a 57% compound annual growth rate from 2020 through 2022, and customers in the category accounted for 61% of overall revenue at the end of last year. Having its sales base centered around large customers should help the company continue to post solid sales growth even in the event of a prolonged economic downturn, and the business appears to be on track for massive long-term growth.
With in-demand service offerings and the stock trading down roughly 73% from its peak, Cloudflare could go on to be a huge winner for patient investors.
3. Electronic Arts
Electronic Arts (EA 0.80%) is one of the world's leading video game publishers, and it's played a huge role in the progression of interactive entertainment. The company is responsible for franchises including Madden NFL Football, FIFA, Battlefield, Apex Legends, and others. With a strong franchise catalog and top-tier development and marketing resources, the company looks well positioned to benefit from the long-term growth of the gaming industry. It's also possible that EA will be an acquisition target.
Consolidation has been a huge trend in the video game industry in recent years, with Microsoft aiming to acquire Activision Blizzard in a $68.7 billion deal and Take-Two Interactive having paid a substantial premium to acquire mobile games specialist Zynga last year. The potential for EA to be bought by a larger technology or entertainment company opens the door for substantial upside in the near term, and it could help to establish something of a valuation floor for the company even if turbulence continues to disrupt the market at large.
EA PE Ratio (Forward) data by YCharts
Crucially, EA doesn't need to get bought out for its stock to deliver wins for investors. With the company's market capitalization sitting at roughly $30 billion and shares trading at approximately 18 times this year's expected earnings, the video game publisher trades at a non-prohibitive valuation that leaves room for substantial upside, and shares look like a worthwhile buy on the heels of a recent valuation pullback.
