Wall Street bankers and fund managers have a tendency to take time off during August and September. As a result, stock market trading volumes drop, and fewer buyers are around waiting in the wings to scoop up any dips that might occur.
In 2023, that seasonal variation got amplified by concerns about rising interest rates as the U.S. Federal Reserve continues its battle against high inflation. As a result, the Nasdaq Composite -- a barometer for the performance of the technology sector -- is down about 7.5% since the start of August.
That drop likely created a buying opportunity, especially since we're approaching the end of this seasonal lull. Plus, some experts expect the Federal Reserve to begin cutting interest rates next year, which will likely lead to a higher risk appetite among investors.
With that in mind, here are two stocks you might want to swoop in and buy during the latest Nasdaq sell-off.
1. Alphabet (Google) is making strides in the artificial intelligence industry
Alphabet (GOOGL 10.22%) (GOOG 9.96%) has been locked in a fierce competitive bout with rival tech giant Microsoft over artificial intelligence (AI) for most of this year. Investors were concerned Alphabet's cash cow, Google Search, would come under threat from Microsoft's new-look Bing search engine, which is now powered by OpenAI's ChatGPT chatbot.
But Google appears to have maintained its dominance in the internet search industry, as its market share remains above 91% globally, as of this writing. To fend off any risks posed by Bing, Google launched its own chatbot called Bard, and it has also embedded AI into its traditional search engine to feed users the information they're seeking far more quickly.
In fact, in the recent second quarter of 2023 (ended June 30), Alphabet saw a companywide acceleration in revenue growth, driven in part by its search business. Google Cloud has also been a bright spot in recent quarters, and it's quickly becoming a key distributor of AI technologies for businesses. The platform offers developers the widest selection of AI supercomputers thanks to its data centers powered by Nvidia chips, and also Google's own chips -- the Tensor Processing Unit (TPU) -- it has built in-house.
In Q2, Google Cloud's revenue grew by 28% year over year, which beat Microsoft Azure (26%) and trounced Amazon Web Services (12%). The platform has attracted over 70% of generative AI unicorns (tech start-ups worth at least $1 billion), which could help supercharge its growth in the future.
In short, investors can pick up Alphabet stock at a 14% discount from its all-time high right now. Given its business appears to be on the upswing, investors might do well to take advantage of the pessimism in the broader market.
2. DigitalOcean is competing with tech giants in the cloud industry
DigitalOcean (DOCN 3.30%) is a competitor to Google Cloud, Microsoft Azure, and Amazon Web Services, except while those platforms are backed by their trillion-dollar parent companies, DigitalOcean is a stand-alone organization valued at just $2.1 billion. It serves small-to-midsized businesses, a niche of the cloud industry often neglected by larger providers.
DigitalOcean focuses on providing cheap, transparent pricing; a simple dashboard with one-click tools to make deploying cloud tools simple for nontechnical staff; and highly personalized service. The company operates its business like a giant funnel. It acquires customers at the start-up phase of their journeys, and it helps them scale into high-growth businesses capable of spending lots of money on its cloud services.
The graphic puts a fine point on the funnel effect. As you can see, DigitalOcean has 616,000 customers in total, but the majority -- 466,000 of them -- are "learners" who only spent $7 million collectively per month in the second quarter of 2023 (ended June 30). They represent just 12% of DigitalOcean's monthly revenue.
Meanwhile, the platform has 16,000 "scalers" at the tip of the funnel, which spent $31 million collectively per month in Q2, accounting for 54% of DigitalOcean's monthly revenue. Here's the great news: The scalers customer group grew by a rapid 40% year over year in Q2!
Data source: DigitalOcean.
DigitalOcean has generated $650 million in revenue over the last 12 months, but that's a fraction of what it estimates is a $98 billion total addressable market. That market is expected to grow by 26% every year between now and 2026, which would take its value to $195 billion annually by then.
DigitalOcean is currently going through a management transition as its CEO of four years stepped down in August, so the short term might be bumpy for this company. But its stock is down a whopping 49% since Aug. 1, and it now trades at the cheapest price-to-sales ratio since the company came public in 2021. This could be a great long-term entry point for investors.
