The U.S. equity market has been mired in uncertainty for the past few months. Worries about rising inflation and a potential recession have affected the share prices of most growth stocks. Although the share price correction is justified for several of these stocks, there are some that have been wrongly punished by the market -- and therein lies the opportunity for savvy investors.
Historically, stock market corrections have been inevitably followed by bull markets. Thus, it makes sense for investors to pick up high-quality stocks with sustainable long-term prospects, such as Salesforce.com (CRM -1.59%), Okta (OKTA -0.10%), and Vertiv (VRT -1.06%), in the current bear market. Let's assess the investment thesis for these stocks in greater detail.
Salesforce
Leading cloud-based customer relationship management (CRM) player Salesforce has been in the news for all the wrong reasons -- activist investors wanting to overhaul the management team, the possibility of being forced to divest Slack, Tableau, and MuleSoft, top management resignations, and employee layoffs. Investors are also concerned about the company's near-term prospects amid a slowdown in corporate spending.
Despite these challenges, Salesforce has surpassed consensus revenue and earnings estimates in the fourth quarter of its fiscal 2023 (ending Jan. 31, 2023). While the top line has come under some pressure due to a difficult macroeconomic environment, the company is now focusing on operational efficiencies to expand margins. It reported a healthy free cash flow of $6.3 billion in fiscal 2023.
Salesforce is also focused on returning value to shareholders, as is evident from its $20 billion stock repurchase program. This is double the $10 billion program announced in August 2022 and is expected to offset the dilutive effect of stock-based compensation on shareholders.
Salesforce has built a comprehensive platform with multiple capabilities to help businesses in activities such as lead generation and automation of sales processes, internal and customer communications, support for building customized business applications, marketing, improving the shopping experience, and data analytics.
The company has further integrated OpenAI's artificial intelligence models into its platform and launched the first generative AI CRM technology, Einstein GPT. This technology is expected to automate several repetitive and mundane tasks for salespeople and customer service workers.
In light of the company's market-leading position in the CRM space, focus on innovations, and recent financial performance, this may be a great time to buy Salesforce stock -- especially with the stock price down by 22% from its 52-week high level.
Okta
Results for identity services provider Okta comfortably surpassed consensus estimates in its fiscal 2023 fourth quarter (ended Jan. 31).
This leading identity and access management player is poised to capture a significant share of the $80 billion addressable market (which includes workforce and customer identity, identity governance, and access management). This is evident considering that the company added 550 new customers (including 190 customers with an annual contract value of over $100,000) in Q4, despite a slowdown in overall corporate spending.
Okta ended fiscal 2023 with 17,600 customers, up 17% on a year-over-year basis. The company's trailing 12-month, dollar-based net retention rate is also a healthy 120%, highlighting the success of its upselling and cross-selling initiatives.
As a loss-making growth company, Okta has seen its stock punished in the past few months. However, the company expects to post a non-GAAP operating profit of $136 million to $145 million in 2024, a significant improvement from its $10 million non-GAAP operating loss in fiscal 2023. Hence, the stock seems well-positioned for an upward movement in the coming months.
Vertiv
In fiscal 2022, data center equipment maker Vertiv suffered from several macro and company-specific headwinds, including foreign exchange fluctuations, project cost escalations, delayed collections in China, delayed advance payments for large orders, and higher-than-expected inventory.
Despite these challenges, there are several factors working in the company's favor, including significant pricing power. The company estimates that price increases brought in an additional $365 million last year. And Vertiv expects an additional $100 million in fiscal 2023 from this approach. The company has also resolved many of its past supply chain challenges and is working to reduce lead times.
Vertiv is enjoying high top-line visibility thanks to the 49% year-over-year increase in the backlog to $4.8 billion in 2022. The backlog covers around 70% of its forecast revenue in 2023. Vertiv has also prioritized improving adjusted free cash flow as a key priority for this year -- by improving adjusted operating profit and working capital optimization.
The data center equipment market is expected to grow from $50 billion in 2021 to $120 billion in 2028. With its primary market in excellent health, the company's share price seem to have significant upside potential in the coming months.
