Shares of technology companies from chipmakers to FAANGs tumbled in the third quarter at the end of September, as weaker earnings, profit warnings and fading CEO confidence added to the doldrums.
The backdrop is a widely expected economic recession next year, caused, in part, by the Federal Reserve’s aggressive interest rate hikes to curb inflation.
The current state of play is complicated. However, buying attractive assets during depressed markets presents tremendous opportunities. And history also shows that bear markets tend to reverse when uncertainty about policy becomes clearer, making times like now a potentially profitable moment to get constructive and buy companies with excellent long-term prospects.
Technology will return to prosperity, and some names are likely to perform well even if the market remains weak for some time.
I believe that four trends — automation, artificial intelligence (AI), cloud and cybersecurity — will continue to see robust demand in even the most challenging economic conditions. Investors should be playing the long game. Here’s a spotlight on four companies in those spaces.
Workflow automation
Companies looking to reduce headcount and optimize for the short term will slow hiring and turn to automation to do more with less. ServiceNow NOW,
enables companies to leverage existing IT and software to build automation for not only network and IT but operational tasks, HR and other business processes. Under CEO Bill McDermott, ServiceNow has consistently delivered above the 40 rule (that a software’s combined growth rate and profit margin must exceed 40%), and the long-term expectations of The company’s growth will continue to be stable even in difficult economic situations. Companies looking to automate will move to ServiceNow, which provides a higher likelihood of seeing continued strong revenue growth during times of economic recession. The company’s shares are down 35% this year, more than the 29% decline of the Nasdaq Composite Index.
Analytics and AI
For some, a Warren Buffett investment in a young company like Snowflake SNOW,
may be enough to attract investors. But the most compelling reason is that companies are pouring investments into intelligent analytics services that enable better business decision-making and support the delivery of better customer experiences. With the cloud data warehouse market expected to grow at a compound annual growth rate (CAGR) of 31% from 2021-2026, reaching $39 billion, Snowflake is the most prominent player in the cloud data warehouse space, coming in under the $2 billion run rate today. I see the sector as growing rapidly, and I think privately held Databricks, MongoDB MDB,
and Oracle ORCL,
the position is fine. However, Snowflake has a strong tailwind supported by approximately 170% net dollar retention, rapidly reducing customer acquisition costs and 97% gross dollar retention. The stock is down 45% this year.
Cloud
Oracle has benefited from having a massive installed customer base for years, which has pushed its cloud portfolio to over $10 billion a year. There is still a long distance between the company and the likes of Amazon’s AMZN,
Microsoft’s AWS and MSFT,
Azure, Oracle saw the fastest cloud growth this past quarter. I believe its large install base is a huge opportunity for workload migration to Oracle’s Gen 2 cloud. With its aggressive pricing strategy, Oracle won more deals for its Cloud Infrastructure business, driving its 50%-plus growth in its most recent quarter. The company also has a strong software as a service (SaaS) portfolio that includes Netsuite and Fusion, which continues to grow in the high 20% to low 30%. The cloud should work well as companies look to pay-per-use technology to manage costs. I expect Oracle to capitalize on this short-termism while continuing to deliver solid results and a dividend for investors who value higher yields. Oracle shares are down 25% this year.
Cybersecurity
Cybersecurity investments really can’t wait for an economic downturn, so I like some games for cybersecurity, from Cisco CSCO,
and Juniper Networks JNPR,
in Crowdstrike CRWD,
and Cloudflare NET,
However, I like Palo Alto Networks PANW,
the best at the moment for its recent strong performance and its strong focus on cybersecurity with both legacy architecture and modern IT networks (next-generation services), which it has acquired through a series of acquisitions under CEO Nikesh Arora. With its recent quarter delivering 27% growth and the company finding profitability again, it feels like this downturn could be a huge opportunity for Palo Alto Networks as demand for cybersecurity technology continues to grow as companies are under greater pressure to protect data and networks. The company’s stock is down only about 4% this year.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advisory or consulting to ServiceNow, IBM, Nvidia, Meta Platforms, Oracle, MongoDB, Cisco, Juniper and dozens of other technology companies. Neither he nor his company holds any equity positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.