Many tech stocks are still trading up big this year, but the rally in the Nasdaq Composite in the first half of the year has faded. The artificial intelligence (AI) boom also seems to be fizzling, and the Fed's promises of higher interest rates for longer have weighed on the tech sector as well.
However, long-term investors know that sell-offs like this often present the best buying opportunities. There are several tech stocks still trading down substantially from their 2021 peaks that present opportunities for outsized long-term returns.
Keep reading to see why two Motley Fool contributors think CrowdStrike (CRWD 2.03%) and Etsy (ETSY 0.34%) are discounted tech stocks worth a closer look today.
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This cybersecurity leader looks like a long-term winner
Keith Noonan (CrowdStrike): CrowdStrike is a leading provider of cloud-based cybersecurity software that protects computers, mobile devices, and servers. Its tech also prevents hardware endpoints from being used to attack internet networks. The company's Falcon platform utilizes AI technologies to profile and respond to attacks, and it continues to become increasingly capable as it encounters and responds to new threats.
While the stock saw some volatility due to macroeconomic pressures and decelerating sales growth, CrowdStrike continues to serve up impressive business results. Thanks to some efficiency and expense-reduction initiatives, the profitability picture at the business continues to improve along key fronts.
CrowdStrike's non-GAAP (adjusted) gross margin for subscription services improved from 78% in last year's second quarter to 80% in this year's period. Its 27% year-over-year increase in operating expenses also lagged significantly behind sales growth in the period. Even though the company has seen some demand headwinds related to macroeconomic uncertainty, CrowdStrike grew revenue by 37% year over year to reach $731.6 million in the second quarter.
Between strong sales growth, improving gross margins, and cost-saving initiatives, the business was able to record very strong earnings and free cash flow (FCF) growth in the period. Adjusted earnings per share soared 106% year over year to reach $0.74, and FCF increased 39% to hit $188.7 million.
Crucially, it looks like the company's long-term growth story is still in the early innings. Advanced cybersecurity services will become mission-critical for a growing number of businesses, and CrowdStrike's adaptive, AI-powered tech provides best-in-class protections.
With the company's share price still down roughly 36% from its high, I think there's a very good chance that investors who take a buy-and-hold approach to the stock will score strong returns.
A forgotten e-commerce stock ready for a turnaround
Jeremy Bowman (Etsy): For much of the pandemic and even the years leading up to it, Etsy was a market darling, delivering impressive growth and strong returns as it strengthened its competitive advantages in its niche which offers an e-commerce platform for the sale of handmade and vintage goods.
Like much of the e-commerce sector, however, Etsy's growth stalled in the economic reopening that occurred as pandemic pressures eased. As a result, the stock trades down 77% from its peak in 2021. However, there are some early signs of a turnaround forming, and the stock is trading at such a discount that investors could get a big payoff if they buy now.
First, despite projections of a calamity in consumer spending, retail sales remain strong, up 0.7% on a monthly basis in September and 3.8% from a year ago when including food services. That's a sign that U.S. consumers still have money to spend. More importantly, while Etsy's gross merchandise sales growth was flat in the second quarter, buyers and sellers started to return to the platform.
For example, after the company saw some quarters of sequential declines in 2022 in active buyers and sellers, both grew sequentially in the second quarter with especially strong growth on the Etsy marketplace. Etsy sellers increased from 5.9 million in Q1 to 6.3 million in Q2, representing 7% sequential growth, and it added 700,000 new active buyers to bring the total to 90.6 million.
Etsy's draw as a selling platform for artisans gives it some resistance to a recession since it's likely to see more sellers gravitate to the platform when people look for supplemental income.
Finally, Etsy remains solidly profitable with an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 26.4%, meaning it trades at just 11 times EBITDA today.
If revenue growth starts to accelerate and it regains its reputation as a growth stock, Etsy shares could soar from here.
