Tech stocks are still down after last year's collapse. While the Nasdaq Composite has rallied by double-digit percentages so far this year, investors can still take advantage of discount prices in the sector.
Though investors are still fearful of recession, savvy investors know that bear markets are often the best time to invest as stocks go on sale. With that in mind, two Motley Fool contributors offer their thoughts on why Alphabet (GOOG -2.19%) (GOOGL -2.01%) and The Trade Desk (TTD -0.56%) are worth buying now.
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Alphabet delivers explosive growth in profits
Parkev Tatevosian (Alphabet): Down nearly 30% off its highs in 2021, Alphabet is one of my favorite tech stocks to buy right now. The company is home to a couple of the most dominant businesses in the world -- Google and YouTube. Google commands an 85% share of the global search engine market, while YouTube is home to over 2 billion monthly active users.
Of course, these services are mostly free, so how does Alphabet make money? By showing advertisements to people browsing those services and others that it offers to customers. The increased desire by advertisers to appear on these services helped Alphabet increase revenue from $66 billion in 2014 to $283 billion in 2022. This phenomenal growth created a virtuous cycle and made even more marketers enthusiastic about the opportunity to influence the purchasing decision of the billions of people using the platforms.
More importantly, Alphabet's business model is incredibly lucrative. In the same years mentioned above, Alphabet's operating income rose from $16.5 billion to $74.8 billion. It's relatively inexpensive to deliver advertisements to users of its apps, especially at scale. The one potential concern is that ad sales are affected by the broader economy, so Alphabet's profitability is somewhat affected by the current market downturn. Marketers are more cautious about advertising now that economies worldwide have slowed in response to Central Banks raising interest rates and the war in Ukraine.
GOOG PE Ratio data by YCharts
Still, that concern is likely already priced into Alphabet's stock, which is trading at a price-to-earnings ratio of 23. This stock rarely trades this cheaply (see chart). Alphabet's stock is not without risk, but the risk-versus-reward balance here is in investors' favor due to the significant pullback in the stock price.
Macroeconomic headwinds have Alphabet's stock trading at a favorable valuation and it's worth considering as a buy while the opportunity lasts.
The leading ad tech player is The Trade Desk
Jeremy Bowman (The Trade Desk): The Trade Desk has been a top growth stock for years, and as the leading demand-side platform (DSP) in ad technology, it's easy to see why.
The stock price is up nearly 2,000% over the last decade as digital advertising has boomed, and more companies have embraced Trade Desk's cloud-based self-serve ad platform, which allows brands and agencies to manage ad campaigns and adjust them using real-time data. Customers have been overwhelmingly happy with its product as it's reported a retention rate of at least 95% in every quarter for nine years.
However, digital advertising has taken a step back over the last year as the pandemic boom has faded and companies are preparing for a recession. Nonetheless, Trade Desk has continued to deliver strong results, bucking the industry trend.
In its fourth quarter, revenue grew 24% to $491 million, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 28% to $245 million, showing the company was able to convert half of its revenue into EBITDA profits. Its high profit margins differentiate it from most tech stocks, which tend to offer high growth but minimal profitability.
Trade Desk also seems poised to dominate the next wave of ad tracking and targeting as its Unified ID 2.0 (UID 2.0) protocol is fast gaining adoption, with top Fortune 500 companies embracing it to replace third-party cookies, which Google Chrome has said it will ban next year.
For investors, now looks like a great opportunity to pick up shares of Trade Desk as it's on sale in the bear market, trading down 45% from its peak in late 2021.
When the ad market recovers, expect Trade Desk stock to come roaring back as well.
