The Nasdaq-100 index features 100 of the largest technology companies listed on the Nasdaq exchange. For that reason, investors often view it as a yardstick for the performance of the tech sector.
The index plunged 33% in 2022, but it has recovered most of those losses with a 39% gain this year, and that's very much in line with history. It rarely falls two years in a row. In fact, that has only happened during one period since the index's inception in 1986 -- it slid for three straight years during the dot-com crash that spanned from 2000 through 2002.
Excluding the dot-com bust, the Nasdaq-100 has delivered an average annual return of 52% in the years following declines. That pattern implies there could still be more gas in the tank to drive it higher over the remainder of 2023.
If that turns out to be the case, I anticipate these two fast-growing tech stocks will be among the winners. Here's why investors should consider buying them now.
AI could supercharge Duolingo's growth
Duolingo (DUOL 3.64%) operates the world's largest digital language education platform, and its stock has more than doubled this year on the back of blockbuster financial results that continue to exceed Wall Street's expectations.
The company has taken a mobile-first approach to teaching, and its application has been downloaded more than 500 million times. Duolingo makes language education accessible anytime, anywhere. Thanks to its gamified features, it's highly engaging for students of all skill and knowledge levels.
Duolingo monetizes its platform primarily through subscriptions. As of the end of the second quarter, around 5.2 million users were paying for subscriptions to unlock additional features -- up an impressive 59% year over year. The number of paid subscribers amounts to 7.9% of Duolingo's 74.1 million monthly active users, and both numbers continue to climb.
But Duolingo is about to unlock new monetization opportunities thanks to artificial intelligence (AI). The company just launched a new subscription tier at a higher price point called Duolingo Max that offers users two AI-powered features. Explain My Answer provides each user with personalized feedback when they make mistakes, and Roleplay is a chatbot users can practice their conversational skills with in the language of their choice.
The new features are powered by Duolingo's in-house AI technology, which it has been working on for a decade, combined with OpenAI's ChatGPT.
Duolingo generated $126.8 million in revenue during Q2, which was up 44% year over year. That was above both the company's guidance and analysts' consensus estimate. Plus, Duolingo delivered a surprise net profit of $3.7 million, whereas analysts had expected to see a loss given that the company is still investing in growth.
It should therefore come as no surprise that Duolingo stock has surged in 2023 -- it's up 120% year to date. But here's the good news for investors who don't own it yet: It's still trading 23% below its all-time high after last year's brutal sell-off in the tech sector, so it's not too late to buy in for the long term.
Splunk is the ultimate machine learning company
Splunk (SPLK) stock has moved higher almost in lockstep with the Nasdaq-100 in 2023 -- it's sitting on a 45% gain year to date. The company has executed incredibly well this year, and if it continues to do so, its stock will likely produce further upside, especially if the broader tech sector marches higher too.
Splunk has developed a machine learning platform that's used by some of the largest companies in the world. Its specialty is ingesting mountains of data, analyzing it, and discovering valuable insights in a live environment. It helps businesses to make real-time decisions based on customer behavior, or when technical issues arise within a sales channel, factory, or logistics network.
For example, brewing giant Heineken uses more than 4,500 digital applications in an operation that distributes 13 billion gallons of beer around the globe every year. After suffering an eight-hour system outage that affected logistics and distribution across 70 countries, it adopted Splunk's technology to ensure a downtime period of that magnitude never happens again. Now, Splunk ingests over 25 million data points per month across all of Heineken's applications, and the number of technical incidents the company experiences has plummeted as a result.
Splunk continues to expand its product portfolio, and in July, it released a series of generative AI tools to make its platform more useful to non-technical staff. For example, customers can chat with the new Splunk AI Assistant the same way they would with ChatGPT, and it can help them understand the different outputs produced by Splunk's platform without necessarily needing programming knowledge.
The company is chasing a piece of a total addressable opportunity worth $100 billion, and considering the company only had $3.8 billion in annual recurring revenue as of its fiscal 2024 second quarter (which ended July 31), it has a long runway for growth. Plus, investors have sent its stock price surging 25% since the release of the company's fiscal Q2 results, in part in recognition of management's focus on profitability.
Over the last couple of years, Splunk's executive team has worked on improving its preferred measure of profitability -- free cash flow -- by carefully managing expenses. At the end of its fiscal Q2, the company's trailing-12-month free cash flow was $804 million, up a whopping 273% year over year. Technology companies that are burning through significant amounts of cash have been shunned by investors in this complex economic climate because they're perceived as riskier, given that it's harder and more expensive to raise fresh capital than it was just a couple of years ago.
Therefore, it was wise of Splunk to get its financial house in order, and its stock is being bid up as a result. It's still trading 44% below its all-time high, so this could be a great buying opportunity, especially as the company's portfolio of AI products continues to grow.
