The Nasdaq Composite (^IXIC +1.71%) closed in correction territory on Aug. 2 for the first time since early 2022. The impetus behind the decline was a disappointing jobs report that hinted at a weakening economy. However, the growth-focused index has since rebounded 4%, and history says it could climb even higher in the coming months.
The Nasdaq has suffered 11 corrections in the last 15 years, through which the index returned a median of 25% during the 12 months following its first close in correction territory. That implies 21% upside by August 2025. Of course, past performance is never a guarantee of future results, but Wall Street analysts are generally bullish on two Nasdaq stocks:
- Alphabet (GOOGL +0.66%) (GOOG +0.41%) has a median price target of $205 per share, implying 27% upside from its current share price of $161.
- Atlassian (TEAM 0.83%) has a median price target of $209 per share, implying 25% upside from its current share price of $167.
Here's what investors should know.
NASDAQ: GOOGL
Key Data Points
1. Alphabet
Alphabet's Google is the largest digital advertiser the world. The company is losing ground across the open internet, but its revenue share will still exceed that of second-place Meta Platforms by 5.5 percentage points this year, according to eMarketer. Alphabet's dominance in internet search (Google Search) and streaming media (YouTube) are the foundations of its successful advertising business. Those platforms let the company collect data and deliver relevant ads to consumers.
Beyond advertising, Alphabet has another important growth engine in cloud computing. Google accounted for 12% of public cloud spending in the second quarter. That figure falls short of the revenue share held by Amazon (32%) and Microsoft (23%), but it still represents progress. Google accounted for 11% of public cloud spending in the same quarter last year. Investments in artificial intelligence tools like Gemini could help the company extend its share gains in the future.
Alphabet reported solid financial results in the second quarter, beating estimates on the top and bottom lines. Revenue rose 14% to $84.7 billion as cloud computing sales growth accelerated. Meanwhile, generally accepted accounting principles (GAAP) earnings jumped 31% to $1.89 per diluted share due to disciplined cost control. Investors have good reason to believe that momentum will continue.
Digital ad spending is projected to grow at 10% annually through 2028, and public cloud services spending is expected to grow at 19% annually during the same period, according to analysts. That puts Alphabet on a path to double-digit sales growth, and diligent cost control should translate into slightly faster earnings growth.
Indeed, Wall Street expects earnings to increase at 17% annually over the next three years. That estimate makes the current valuation of 23 times earnings look fair. Those figures give a PEG ratio of 1.3, a discount to the five-year average of 1.5. That number is also a discount to Microsoft's and Meta Platforms' PEG ratios of 2.6 and 1.5, respectively. Therefore, investors should feel comfortable buying a small position in Alphabet stock today.
NASDAQ: TEAM
Key Data Points
2. Atlassian
Atlassian provides software for work management, IT service management (ITSM), and enterprise planning. Collectively, its products help businesses plan, track, and complete projects. The company is a recognized leader in DevOps platforms, which is software that supports collaboration between development and operations teams. Atlassian also has a strong presence enterprise service management software.
What sets Atlassian apart is its ability to unify work management, ITSM, and enterprise planning tools on a common platform that connects technical teams (development and operations) with nontechnical teams (finance, human resources, and marketing). To add, Atlassian also relies heavily on word-of-mouth marketing to attract new customers, which allows the company to outspend its peers on product development.
That strategy theoretically creates a flywheel, whereby compelling products naturally draw customers to Atlassian, and aggressive investments in R&D continuously add more value for customers. Atlassian's most recent shareholder letter states: "This flywheel is a unique advantage, efficiently landing thousands of new customers of all sizes from around the globe each quarter. It's what allows us to have one of the most efficient [go-to-market] models in all of software."
Atlassian reported good financial results in the fourth quarter of fiscal 2024 (ended June 2024). Revenue increased 20% to $1.1 billion and non-GAAP net income increased 16% to $0.66 per diluted share. However, the stock plunged following the report on weak guidance. Management expects revenue to increase 16% in fiscal 2025, a modest slowdown from the 23% growth the company reported in fiscal 2024.
However, there was some good news. Management said, "We continue to expect total revenue over the next three years to grow at a compounded annual growth rate in excess of 20%." Additionally, Atlassian estimates its $67 billion addressable market is growing at 13% annually, and the company sees a significant opportunity ($23 billion) to expand its relationship with existing customers.
Wall Street expects adjusted earnings to increase at 19% annually through fiscal 2027. That consensus makes the current valuation of 57 times adjusted earnings look expensive. Atlassian is a good company with a strong competitive position, but I would keep this stock on my watch list for the time being.
