The Nasdaq-100 technology index plunged into bear territory in 2022 with a 33% loss. It still remains 12% below its all-time high despite a roaring start to 2023, but the official beginning of the next bull market could be right around the corner.
Many of the economic issues investors have concerned themselves with appear to be easing; inflation is rapidly falling, and economists believe the U.S. Federal Reserve might cut interest rates before the end of this year. Those factors could pave the way for further upside in the stock market.
Many individual stocks are still trading below their all-time highs, but not all of them represent good value. With that in mind, here's one to buy now, and one investors probably shouldn't take into the next bull market.
The stock to buy: CrowdStrike
Cybersecurity giant CrowdStrike (CRWD 1.70%) is off to a flying start in 2023. Its stock has soared 46% so far, outperforming the Nasdaq-100 index, which is up 34%. The company just reported its financial results for the fiscal 2024 first quarter (ended April 30), and while investors initially responded negatively, there was a lot to like.
CrowdStrike is a recognized leader in protecting the endpoint, which includes all the computers and devices employees might use to access their company's network. It's where the majority of breaches originate because employee emails, messaging systems, and even payment mechanisms can be an easy access point for hackers. It uses artificial intelligence (AI) to offer advanced, accurate protection, with its models ingesting over 2 trillion events per day.
Beyond the endpoint, CrowdStrike offers a whole portfolio of tools for the cloud, threat intelligence, and identity protection, to name a few. Think of the company's platforms like a giant neural network -- the more customers who join, the more data its AI models ingest, the more those models learn, and the better the protection is for everybody.
Like many innovative technology companies, CrowdStrike has always prioritized investing in growth at the expense of profitability. It has a strong balance sheet with $2.9 billion in cash, equivalents, and short-term investments, so it can afford to absorb net losses so long as customer growth and revenue growth remain strong. But given the tough economic conditions right now, investors have pushed CrowdStrike to focus more on achieving profitability, and the company has obliged.
CrowdStrike's Q1 revenue came in at $692.5 million. It was a 42% year-over-year increase, but a slowdown from 61% in the same period last year. Why? Because the company slowed the rate of increase in its operating costs to help improve its bottom-line results.
It worked -- after stripping out one-off and non-cash expenses, CrowdStrike generated a record non-GAAP net income of $136.3 million, and it also delivered a modest GAAP net income of $0.5 million. These positive results should give investors confidence, because they prove the company is capable of standing on its own two feet by operating profitably.
In any case, CrowdStrike has a substantial opportunity ahead as companies rely more heavily on cloud computing technology, which makes them vulnerable to cyber attacks around the clock. Advanced cybersecurity tools -- especially those powered by AI -- have the potential to become more valuable than ever. Since CrowdStrike stock remains 47% below its all-time high, this could be the ideal time for investors to buy.
The stock to leave behind: Robinhood
Robinhood Markets (HOOD 3.48%) exploded in popularity at the height of the COVID-19 pandemic in 2020 and 2021. But despite the company launching innovative new products like cryptocurrency trading and a 24-hour stock market trading service, it has struggled to maintain momentum when it comes to growth.
In the recent first quarter of 2023, Robinhood had 11.8 million monthly active users, which was the first sequential increase in seven quarters. But the figure was still 44% below its all-time high of 21.3 million from Q2 2021. With stocks falling sharply in 2022, many younger investors soured on the financial markets, though it's possible they'll return as the recovery continues.
As a result, Robinhood's assets under custody (the dollar value of the cash and financial assets customers hold on the platform) came in at $78 billion, which was also down 23% from its 2021 peak. The company's primary revenue source comes from transaction fees through its payment for order flow model, so when assets under custody shrinks, it has a smaller base to earn money from.
But Robinhood has felt some reprieve lately thanks to higher interest rates. The company earns interest on the $6.3 billion in cash on its balance sheet, and the $3 billion in cash its customers are holding on the platform, plus it earns interest when it lends money to clients to buy stocks. As a result, its net interest revenue surged 278% year over year in Q1 to $208 million, making up nearly half of the company's $441 million in total revenue.
But here's the problem: As I touched on earlier, the Federal Reserve is expected to start cutting rates soon, which means this is only a temporary windfall for Robinhood. Therefore, even as the economy picks up steam, there's a good chance any increase in its transaction revenue will be offset by a decline in net interest revenue.
Robinhood stock is lagging behind the Nasdaq-100 index this year with a gain of just 15%, and it's still down a whopping 86% from its all-time high. The company currently has a market capitalization of $8.4 billion, but considering it has $6.3 billion in cash on hand, investors are effectively valuing Robinhood's actual business at just $2.1 billion. It speaks to their lack of confidence in the company to put that cash to work to drive growth.
As a result, despite the 86% discount in Robinhood stock, it certainly doesn't scream value right now.
