The S&P 500 slipped 5% in September as Wall Street grappled with the growing probability that Fed policymakers will keep interest rates elevated for a prolonged period of time. The September backslide halted the momentum stocks had been building throughout the year, but smart investors know corrections are nothing more than buying opportunities.
With that in mind, shares of Amazon (AMZN 2.61%) and Zscaler (ZS +1.30%) have slipped 31% and 53% from their all-time highs, respectively. But the underlying investment theses remain intact, and both stocks look quite attractive at their current valuations.
Here's what investors should know.
NASDAQ: AMZN
Key Data Points
The investment thesis for Amazon
Amazon has a strong presence in e-commerce, digital advertising, and cloud computing, and the company is well-positioned to take a share in all three markets. Even so, the stock trades at a substantial discount to its historical valuation, and shares look downright cheap in the context of future growth opportunities.
- E-commerce: Amazon operates the most-visited online marketplace in the world, and its scale (buttressed by brand authority and a vast logistics network) should keep the company at the forefront of e-commerce for years to come. Indeed, its share of online retail sales in North America and Western Europe is expected to increase by 50 basis points this year.
- Digital advertising: Amazon is the third-largest adtech company in the world, an achievement made possible by its unique ability to engage consumers and source shopper data from its marketplace. Amazon should continue to gain ground as brands lean into retail advertising. Indeed, its share of digital ad spend is projected to increase by 60 basis points this year.
- Cloud computing: Amazon Web Services (AWS) has led the market for cloud infrastructure and platform services for more than a decade, and its market share rivals that of Microsoft Azure and Alphabet's Google Cloud Platform combined. IT consultancy Gartner attributes that success, in part, to the unequaled breadth and depth of its cloud services portfolio, which itself hints at a remarkable capacity for innovation. That quality should keep AWS at the forefront of cloud computing for the foreseeable future.
Here's how that shakes out: Retail e-commerce sales are expected to grow at 8% annually through 2030, while the cloud computing and adtech markets are forecast to grow at 14% annually over the same period. That means Amazon has a good shot at low double-digit sales growth for many years to come.
Indeed, Morningstar analyst Dan Romanoff expects Amazon to grow revenue at 11% annually through 2027. That forecast aligns with trailing-12-month revenue growth, and it makes the current valuation of 2.5 times sales look quite attractive, especially when the five-year average is 3.4 times sales. Investors can buy this growth stock with confidence.
NASDAQ: ZS
Key Data Points
The investment thesis for Zscaler
Zscaler is a cybersecurity company that specializes in zero-trust network access and cloud workload protection. Its platform (known as a security service edge, or SSE) modernizes corporate networks by moving policy enforcement and threat detection to the cloud, away from private data centers. Doing so eliminates the need for costly on-premises security appliances, and it affords businesses better protection against cyberattacks.
Zscaler has the distinct advantage of running the largest network security cloud in the world. Its SSE platform handles more than 320 billion transactions each day, and it collects more than 500 trillion security signals in the process. Those data points continuously inform its artificial intelligence (AI) engine, creating a network effect that results in superior threat protection, according to CEO Jay Chaudhry.
Industry analysts consistently praise the company for its technological prowess. Most recently, the International Data Corp. recognized Zscaler as a leader in zero-trust network access, and Gartner recognized its leadership among SSE providers. Those commendations put Zscaler at the heart of a critical issue. To quote Chaudhry, "Growing cyberthreats, including ransomware, are driving IT leaders to transform security from legacy network security to zero-trust architecture."
On that note, Zscaler values its addressable market at $72 billion, a colossal figure compared to its trailing 12-month revenue of $1.6 billion, and analysis from Morgan Stanley says revenue could grow at 25% annually over the next five years. That seems plausible, given that Zscaler grew revenue by 48% over the past year, and it makes the current valuation of 15.4 times sales look very reasonable. For context, the three-year average is 32.8 times sales. That's why this growth stock is a no-brainer buy right now.
