- Rising interest rates, accelerating inflation, and an economic slowdown dampen sentiment
- High-growth technology stocks were the year’s worst-performing group
- The Tech selloff has created buying opportunities in some former market darlings
With less than two months left until the end of 2022, Wall Street stocks are on track to suffer one of their worst annual performances in history. Investor sentiment was dominated by fears of aggressive rate hikes by the Federal Reserve to combat persistently high inflation, which could potentially plunge the economy into recession.
The blue-chip is down 15.9% year-to-date (ytd), while the and the tech-heavy are down 21.8% and 31.7% respectively.
Despite the turmoil, I believe ServiceNow (NYSE: ) and Cloudflare (NYSE: ) are poised for a strong rally due to the robust demand outlook for their innovative tools and services.
The two out-of-favor growth stocks have plenty of room to expand their respective businesses, making them solid long-term investments. NOW and NET are worth considering at these depressed levels as the battered sector tries to recover from its selloff.
Service Today
- Date of Earnings: Wednesday, October 26 after closing
- Year-To-Date Performance: -45%
- Market Cap: $71.7 billion
Fragile sentiment among many leading technology companies, especially the high-growth software sector, has seen ServiceNow shares come under intense selling pressure, hitting a series of fresh 52-week lows recently.
NOW stock fell to $337.21 on Oct. 13, its lowest level since May 2020; it ended Tuesday’s session at $356.79. This is about 50% below its all-time peak of $707.60 touched in November 2021.
The 45% ytd decline creates a solid entry point to the downtrodden name given its solid status as an industry leader in a high-growth market.
The Santa Clara, California-based software giant provides tools that help other businesses track and manage digital workflows for enterprise operations. It boasts a 99% customer renewal rate as businesses accelerate cloud migration and enterprise digitalization trends.
ServiceNow had better-than-expected Q2 earnings at the end of July but missed its annual guidance.
NOW has been able to match or beat Wall Street’s profit expectations in every quarter since it went public in Q2 2014, highlighting the strength and stability of its business.
Investors will be watching for an update on enterprise customer additions as it surpassed 100 customers paying over $10 million in annual contract value in Q2, representing annual growth of more than 50%.
Wall Street has a long-term bullish view on ServiceNow stock, with 32 of 37 analysts surveyed by Investing.com rate it as a ‘buy’.
Cloudflare
- Date of Earnings: Thursday, Nov. 3 after closing
- Year-To-Date Performance: -59.6%
- Market Cap: $17.3 billion
Cloudflare, which provides web security and infrastructure services, has fallen out of favor this year amid a general tech selloff.
After rallying to a record high of $221.64 in November 2021, NET stock, down a whopping 59.6% ytd, quickly fell to a low of $38.96 on June 16. Cloudflare shares staged a mild rebound, closing to $53.09 on Tuesday, but they still stand about 76% below their all-time high.
The San Francisco, California-based cybersecurity specialist has a market cap of $17.3 billion compared to around $50 billion at its peak.
The sharp selloff in Cloudflare stock creates a compelling buying opportunity considering the robust demand for its networking and cybersecurity tools amid the current geopolitical backdrop.
Cloudflare raised its full-year guidance after its second-quarter sales record. It has beaten Wall Street sales estimates for 12 consecutive quarters, a string of consecutive returns since the company went public in September 2019, reflecting rising demand for in its products
According to Investing.com, Cloudflare is expected to deliver breakeven earnings per share for the third quarter. Revenue is expected to rise 45.4% yoy to $250.6 million, bucking a slowdown in the rest of the cloud software industry.
Investors will keep an eye on Cloudflare’s large customer base. The cybersecurity company said the number of clients spending at least $100,000 annually jumped nearly 61% yoy to 1,749 in Q2.
An Investing.com the survey revealed that all 25 analysts covering NET rated it as either a ‘buy’ or a ‘hold’.
Disclosure: At the time of writing, Jesse is long the S&P 500 and Nasdaq through the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ). He is also long in the Technology Select Sector SPDR ETF (XLK) and the WisdomTree Cloud Computing ETF (WCLD). The views discussed in this article are solely the opinion of the author and should not be construed as investment advice.