With concerning levels of inflation and rising interest rates injecting bearish sentiment into the market, the last year has been challenging for tech-focused investors. Trading for the broader market could continue to be bumpy in the near term. But strong businesses will be able to make it through rough patches, and the current batch of macro challenges has resulted in valuations for some great companies being pushed down to levels that could lead to fantastic returns for long-term investors.
Read on for a look at two stocks that have lost more than half of their value and are worth pouncing on right now.
Image source: Getty Images.
Meta's stock price includes lots of bad news
Parkev Tatevosian: Down 50% off its highs of 2021, Meta Platforms (META -0.52%) may offer investors an excellent opportunity. Admittedly, the stock price deserved some discount following significant headwinds that arose over recent years. Apple implemented privacy policy changes, making it more difficult for Meta to sell targeted advertising. Meanwhile, the meteoric rise of TikTok has captured the attention of people who might otherwise have spent that time on one of Meta's apps.
Still, to say that those challenges should make Meta's business worth half as much might be overreacting. Meta Platforms boasts over two billion daily active users across its family of apps. Of course, the apps are free to join and use, but Meta has been able to monetize its business model effectively. Between 2018 and 2022, Meta's revenue exploded from $55.8 billion to $116.6 billion.
My favorite part of Meta's business is the robust profits. Between 2018 and 2022, Meta's operating income increased from $24.9 billion to $28.9 billion. Furthermore, to balance the slowing revenue growth, Meta announced several rounds of layoffs and cost cuts. These moves should help shore up profitability, even if slower revenue growth persists. The stock price is trading as though Meta will never return to the double-digit growth rates it regularly achieved before the headwinds emerged.
META PE Ratio (Forward 1y) data by YCharts
At a forward price to earnings of 15.81, Meta Platforms stock is arguably priced like it will not overcome these challenges, and revenue growth will stall. That's good news for investors who could benefit from the upside if Meta does find a workaround.
Cloudflare's strength with large customers is promising
Keith Noonan: In addition to being the top provider of protections against distributed-denial-of-service (DDoS) attacks, Cloudflare (NET -0.23%) is also a leading provider of content-delivery-network (CDN) and domain-name-system (DNS) services. While growth stocks could remain under pressure due to macroeconomic factors in the near term, I think the web-services leader stands out as a worthwhile buy at current prices and see its continued momentum with large customers as a sign that the business remains on the right track.
Revenue from customers generating at least $100,000 in annual sales grew from $117 million in 2019 to $591 million in 2022 -- good for a 71% compound annual growth rate (CAGR) across the stretch. In addition to increasing spending from customers already using its platform, the company has also had plenty of success attracting new clients in the cohort. Cloudflare's large customer cohort grew at a 57% CAGR from 2019 through 2022, reaching 2,042 customers at the end of the period. Large customers accounted for 61% of total sales at the end of the year.
Not only do large customers move the needle more in terms of revenue growth, they also tend to be more stable and reliable during periods of economic downturn. While small and medium-sized businesses remain an important part of the company's overall growth strategy, clients in this category are more likely to significantly scale back service usage or even go out of business when macroeconomic conditions are tough. Cloudflare's services are likely deeply integrated with the operations of its large customers, and the crucial nature of its DDoS and CDN technologies means that they're not likely to wind up getting dropped in the face of cost-cutting initiatives.
While Cloudflare's non-GAAP (adjusted) gross margin of 77% in the fourth quarter was down slightly from the 78% margin it posted in the previous quarter and the 79% margin it recorded in Q2, the company's asset-light business model suggests it should be able to record very strong gross margins. As the company's business scales and sales, marketing, and other expenses come to constitute a smaller portion of overall revenue, the business is positioned to see very strong earnings growth down the line.
With shares trading down roughly 75% from their peak, I think Cloudflare stands a very good chance of delivering strong returns for long-term investors who buy the stock at today's prices.
Meta and Cloudflare are top tech stocks for the long term
Beyond business-specific pressures, there are multiple macroeconomic factors that are depressing valuations for tech stocks at large right now. It's impossible to know exactly when these macro headwinds will begin to dissipate, but strong companies in the technology sector should be able to weather the current batch of challenges and continue thriving as conditions become more favorable.
Despite bearish sentiment, Meta Platforms and Cloudflare each have powerful competitive advantages and clear pathways to long-term growth. Long-term investors may be able to score big wins by putting money behind these stocks on the heels of big valuation pullbacks.
