The past 14 months have been filled with uncertainty for U.S. stocks. After a difficult 2022, the market seemed to have breathed a sigh of relief in early 2023. However, worries about rising inflation and increasing interest rates are again dampening investor sentiment.
While no one can predict with any certainty the future of the stock market, it's always a prudent move to seek out high-quality stocks. Three to consider right now are Palo Alto Networks (PANW -1.71%), Duolingo (DUOL -0.71%), and Shockwave Medical (SWAV 0.04%).
Palo Alto Networks
With enterprises shifting to cloud-based infrastructure and adopting hybrid work arrangements, the "attack surface" available for cybercrimes has expanded dramatically. Cybercrimes have become very frequent and are estimated to cost a whopping $24 trillion by 2027. This trend has made cybersecurity a necessity for businesses around the world. Cybersecurity expert Palo Alto Networks has been quite successful in leveraging this opportunity.
By 2025, Gartner expects 80% of enterprises to opt for single-vendor solutions that integrate security across the Web, cloud, and private infrastructure. Palo Alto can emerge as a major beneficiary of this vendor consolidation trend, since it offers a range of security services, such as Strata (firewalls and on-premise network security), Prisma (zero trust network security, cloud-native security), and Cortex (endpoint security, security analytics and automation, and threat intelligence).
Thanks to strong demand for its cybersecurity products even in a tough economic environment, Palo Alto has managed to surpass consensus revenue and earnings estimates in the second quarter (which ended Jan. 31). While revenue grew by 26% year over year to $1.7 billion, the company's remaining performance obligations (RPO, a metric measuring the total value of unfulfilled customer contracts and indicative of future revenue potential) grew even faster at 39% year over year to $8.8 billion. Hence, the company's fiscal 2023 revenue outlook of $6.85 billion to $6.91 billion seems easily achievable.
Palo Alto became profitable on a generally accepted accounting principles (GAAP) basis in the first half of fiscal 2023. Coupled with its solid growth prospects in the rapidly growing cybersecurity market, the company seems to be a long-term buying opportunity now.
Duolingo
Leading mobile-based language learning application Duolingo has managed to differentiate itself from the competition by adopting a gamification approach to learning. This makes learning enjoyable, which in turn helps attract new customers and retain the existing ones. The company has deployed artificial intelligence algorithms to assess the starting knowledge of customers and then to personalize lessons for optimal learning.
The success of the company's strategy is evident in its strong operational and financial performance. While many consumer discretionary companies have taken a hit in the current uncertain economic environment, Duolingo reported impressive revenue and earnings growth in 2022. Revenue was up 47% year over year to $370 million.
The company also reported a meaningful margin improvement in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), from a negative 0.4% in 2021 to a positive 4.2% in 2022.
Duolingo ended the fourth quarter with 16.3 million daily active users, up 62% on a year-over-year basis. The company implements a "freemium" pricing model, which enables customers to first get acquainted with the app. Many of these customers are then upgrading to a paid version of the application because of its high quality, as is apparent from the 67% year-over-year jump in its paid subscriber base to 4.2 million in 2022.
Although Duolingo is not yet GAAP profitable, it is making strides in the right direction. The company is free-cash-flow positive and has a solid balance sheet ($608.2 million in cash and only $23.5 million of debt). All these factors make this innovative educational stock a strong buy now.
Shockwave Medical
Medtech company Shockwave Medical's intravascular lithotripsy (IVL) devices, which are specialized catheters, use high-amplitude sonic pressure waves to remove calcium deposits from the arteries of patients with coronary and peripheral artery disease. Being cheaper, more effective, and safer -- they don't harm the surrounding soft tissue -- Shockwave's devices have been in high demand for the past few years.
Thanks to its superior technology and absence of significant competition, Shockwave managed to post stellar numbers in 2022. Revenue grew by 107% year over year to $489.7 million, and gross margin improved by 400 basis points year over year to 87%. The company is already profitable and has a healthy balance sheet with $305 million in cash and almost insignificant debt.
Shockwave is currently targeting a market opportunity of more than $8.5 billion. With an annual run rate close to $500 million and a mostly recession-resilient business model, there is huge potential for this company to grow in the coming years.
