August and September are historically two of the worst-performing months for the markets each year due to seasonal factors. Many Wall Street bankers take time off, which lowers trading volume, and fewer buyers are around to prop up dips in the market. What makes this year even tougher is that investors are navigating a challenging interest rate environment, with mortgage rates and key U.S. government bond yields rising to levels that could put the brakes on the broader economy.
A combination of the above headwinds sent the Nasdaq Composite technology index plunging 7.4% between Aug. 1 and Sept. 30, and that weakness carried through to October as well. As a result, many individual tech stocks now trade at attractive prices.
But not all discounted stocks are created equal, so it's important for investors to be selective. Here's one stock to buy during the recent tech sell-off, and one to sell.
The stock to buy: CrowdStrike
According to an estimate by McKinsey & Company, cyberattacks could result in as much as $10.5 trillion in damage annually starting in 2025. The firm says companies should be prepared for an increase in attacks by spending a collective $2 trillion per year on cybersecurity protection, but these businesses are only on track to spend about $189 billion in 2023. That's a significant gap, which suggests opportunities for leading providers of cybersecurity software like CrowdStrike Holdings (CRWD 2.03%).
Businesses are increasingly operating in the cloud, which means all of their valuable data and digital assets are hosted online. That makes them vulnerable to cyber threats around the clock, which could originate from anywhere in the world.
CrowdStrike not only offers cloud security, but it's also a specialist at protecting the endpoint, which describes any computer or device employees use to access their company's network.
CrowdStrike says 90% of successful cyberattacks and 70% of successful data breaches start at endpoints, because employees frequently interact with the outside world through email, phone calls, and messaging platforms. Each of those interactions creates a vulnerability that can be exploited by malicious actors.
But not every individual can be a cybersecurity expert, which is why the company relies heavily on artificial intelligence (AI) to automate threat detection and incident response. CrowdStrike protects over 23,000 customers, from which it collects 2 trillion data points each day. That information is used to train its AI models to increase their accuracy, and as the company grows, it will only continue to improve, which should attract even more customers seeking the most advanced protection.
The company also just released a generative AI chatbot called Charlotte, which it says will help companies get to the bottom of incidents and spot vulnerabilities more quickly than ever before.
In the recent fiscal 2024 second quarter (ended July 31), annual recurring revenue jumped 37% year over year to $2.9 billion. While that's impressive, it's a fraction of what the company predicts will be a $158 billion addressable market by 2026 -- but if McKinsey & Company's analysis is accurate, CrowdStrike's long-term runway will be even greater.
CrowdStrike stock has been flat since the beginning of August despite the broader market sell-off, which speaks to investors' confidence in the company. But it remains 41% below its all-time high from 2021, so now is still a great time to buy in for the long run.
Image source: Peloton Interactive.
The stock to sell: Peloton Interactive
Share prices of Peloton Interactive (PTON 4.29%) are down 46% since the beginning of August and now trade 96% below their all-time high, which was set during the height of the pandemic in 2020. Over the past few years, Peloton grew to be a globally recognized brand for its at-home digitally connected exercise equipment.
Peloton's stationary exercise bike, treadmill, and rowing machine are fitted with screens that display virtual workout classes and a host of applications to make exercising more interactive. Naturally, those products were a smash hit when pandemic-related lockdowns were in play, and they sent annual revenue surging to an all-time high of $4 billion in fiscal 2021 (ended June 30, 2021).
But the company has since suffered two consecutive years of sales declines, with fiscal 2023 coming in at just $2.8 billion. To Peloton's credit, it installed a new management team, which is making all the right moves. It slashed costs by laying off employees and offshoring manufacturing, and it opened new sales channels through third-party retailers like Amazon and Dick's Sporting Goods.
To offset sluggish equipment sales, Peloton has focused on acquiring more users for its mobile application, which earns revenue through monthly subscriptions. The company wants to cater to an audience that enjoys working out without hardware, whether users prefer activities like running or yoga, for example.
The app provides step-by-step workout plans and a platform to track your progress. And the highest-tier subscription ($24.99 per month) allows the user to plug the app into third-party, non-Peloton equipment, which should help increase its addressable market.
At the end of fiscal 2023, the company had 828,000 stand-alone members on the platform, which is still far less than the 3 million connected-fitness subscribers (Peloton equipment owners with an active subscription). Theoretically, the app should scale up quite fast because it doesn't require the purchase of any hardware.
While these are all positive developments, Peloton still lost $1.2 billion in fiscal 2023. Many of its costs for the year were one-offs and noncash in nature (like supplier settlements and stock-based compensation), but the company is still very much in a fight for survival since it only has $813 million in cash on hand.
With Peloton stock trading at a fraction of its all-time high and with interest rates still climbing, questions remain as to whether the company will be able to raise more cash to continue its turnaround. That's a risk investors don't have to take right now, especially with high-quality opportunities like CrowdStrike available.
