Investors have had a change of heart after selling off technology stocks for the better part of eight months.
There was a change in trend after the bellwether tech companies reported earnings for the latest quarter.
While many thought this was the time when the bubble for tech profits would burst, that was not the case. The results were largely stronger than expected despite concerns about out-of-control inflation, rising interest rates, a protracted war in Europe and endless recessions that linked to Covid-19 has led to increasing pressure on global supply chains.
Sure, some discretionary and consumer tech saw pullbacks. PC demand has weakened, and ad-tech for companies not named Alphabet GOOG,
and Amazon AMZN,
has slowed down. However, after reporting a large portion of tech names, it’s safe to say that tech has been more resilient than most expected.
Beyond the Fantastic 4, there is a wave of high-flyers that I believe have a solid long-term outlook based on secular trends. Here are five companies:
shares have rallied 80% from record highs, hurt by slower growth and higher interest rates. However, Twilio has cornered the CPaaS (communications platform as a service) market, and when it comes to customer engagement through messaging, Twilio and its developer ecosystem are the market leaders. The company had 41% revenue growth last quarter, exceeding expectations, while net revenue retention – the portion of recurring revenue retained from existing customers – remained above 120%. The transition to profitability will be an inflection point for the company, but its revenue growth makes it more of a matter of when, rather than if.
The Rule of 40 is one of ServiceNow NOW,
CEO Bill McDermott’s favorite metrics to call. (It’s the principle that a software’s combined growth rate and profit margin must exceed 40%.) And the path to $16 billion in revenue by 2026 is firmly in the company’s hands despite externalities. that factor worries some investors about technology spending. In its recent earnings report, ServiceNow had overall solid results and continues to benefit from tailwinds for workflow automation and AI that will expand productivity while managing human capital investment. While the stock still trades at a high multiple, it saw a decline of more than 40% before a slight rebound on good results and positive guidance. While McDermott’s comments on foreign exchange may have spooked investors, demand for its platform remains robust. It will continue to grow even in a more challenging macro environment — perhaps best evidenced by the more than 600 open sales and marketing jobs that ServiceNow is trying to fill.
With data breaches top of mind in nearly every organization, the cybersecurity market is ripe for growth. Zscaler ZS,
has consistently exceeded expectations and looks likely to see its share price accelerate in line with its earnings growth. Over the past four quarters, the company has regularly beaten expectations on the top and bottom line. However, losses increased as profits grew, and like the other names on this list, that almost certainly got investors worried. The seculars here are significant, however, and market growth over the next eight years is set at around 12% CAGR (compound annual growth rate) with industry-wide cybersecurity spending exceeding $500 billion by 2030. Zscaler’s revenue jumped more than 60% during the third quarter. With the rapid pivot to work-from-home and hybrid work, the company’s challenges in securing data have become more significant. This trend, along with increased hacking, has led to “zero trust,” which requires constant authentication of all users trying to access data and applications to eliminate breaches. And regardless of the broader economic situation, the need for cybersecurity won’t change — if anything, it’s becoming more critical.
Databases are very complex and, for most non-technical investors, can be a boring subject. However, the applications we rely on for business and enjoy for personal use require a highly scalable next-generation document-based database that works well with very large data sets. MongoDB MDB,
saw continued top and bottom line growth and beat estimates to make earnings-per-share profitable in its most recent quarter. The company is hiring aggressively despite a cautious market outlook, with more than 230 open sales and marketing jobs listed. With the rapid proliferation of data and apps, the need to have developers to drive innovations is essential. MongoDB is well-placed with its focus on a developer data platform increasing its competitiveness and helping it stack up against the likes of Snowflake SNOW,
and Databricks, which is privately held.
does something important for businesses that most investors probably don’t know about. Like MongoDB, Confluent’s solution is highly technical, making it an even more meaningful move for investors to understand. However, Confluent has a purpose-built open-source-based solution that allows companies to move their data more seamlessly to the cloud, which is why it exists and why companies like of Citigroup and eBay its platform. The monetization model is similar to Red Hat, whose underlying community version is Kafka. With massive mobile app and data usage, legacy ETL (extract, transform and load) and batch processing is no longer enough. With growth exceeding 50% in the most recent quarter and guidance for profit and narrowing losses coming out better than expectations, Confluent looks poised for a significant bounce, which has already begun after its latest results.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advisory or consulting to Nvidia, Intel, Qualcomm and dozens of other companies. Neither he nor his company holds any equity positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.