Jequities have suffered in 2022 as investors retreat from risky stocks. At a time of runaway inflation, federal interest rates creeping higher, and there’s a high-stakes war on the fringes of Europe, perhaps it makes sense to prefer ultra gold bullion. -safe and federal bonds to the market darlings of yesteryear.
Again, the market correction has also reduced the stock prices of many high-quality companies that should weather this difficult period and prosper in the long term. Picking up these discounted winners also makes a lot of sense. On that note, we asked three of Fool’s contributors to share their best deep discount ideas in today’s volatile market. Read on to see why they recommend Palo Alto Networks (NASDAQ: PANW), monday.com (NASDAQ: MNDY)and Etsy (NASDAQ: ETSY) at present.
A hungry little fish in a big pond
Anders Bylund (monday.com): As a provider of cloud-based application development tools, Monday.com caters to a huge global market. The company has crushed Wall Street expectations in each of the three earnings reports it has released as a public company. In Wednesday’s fourth quarter update, for example, Monday’s net loss was half the size expected by your average analyst and revenue was 8% higher than Street’s consensus estimate. Sales almost doubled year on year.
However, management has set the financial guidance bar low with easily achievable revenue targets for the next quarter and fiscal year. Full-year sales are expected to outpace the 2021 total by about 54%, a sharp slowdown from last year’s 91% jump. Investors saw these lowball targets as a sign of weakness. The haircut was quick and brutal. Monday’s stock fell 30% on Wednesday.
I understand. The deceleration in revenue growth can be frightening when the business is not profitable and must be measured by its revenue-generating chops. At the same time, Monday’s management has already significantly exceeded its own revenue targets. Remember those all-too-modest fourth-quarter analyst estimates? They were largely in line with Monday’s forecast for the period. This week’s ultra-conservative guidance projections could very well prove too humble, setting the stock up for a dramatic rebound as the high-octane growth story unfolds.
And don’t get me wrong – I see a lot of rocket fuel in Monday’s tanks. The company’s application development platform provides an easy way to build out-of-the-box software through a point-and-click process with little to no actual coding. The target market for this developer-friendly template is now around $56 billion in annual sales and growing. Seizing even a small slice of this hefty opportunity should push Monday’s sales, earnings and stock price much higher.
That’s why I think the market’s reaction to Monday’s fourth quarter report was a big mistake. This company is poised to generate outsized business growth in a wide variety of market conditions.
A next-gen cybersecurity leader with strong free cash flow
Billy Duberstein (Palo Alto Networks): As the market battles the twin threats of geopolitical risks and rising inflation, cybersecurity companies that generate profits and cash flow today could be a good safe haven for your investment dollars. Russia is a very active player in cyber attacks, so businesses and governments around the world will likely be looking to invest in the latest and greatest in cyber innovation.
Palo Alto Networks is a cybersecurity leader, with a strong historical position in firewalls, as well as a forward-thinking management team that has turned to cloud security software and data centers. security operations. Palo Alto recently announced very strong earnings that exceeded revenue and adjusted earnings per share, while increasing guidance for the full year.
Strong growth has been driven by an aggressive pace of innovation, with the number of major new product launches accelerating over the past four years, driving growing consumption of cloud and next-generation software, and therefore higher revenues . For example, Palo Alto’s Cortex XSIAM product for security center operations, which was organically developed, reduced threat detection time from 10 days to hours or even minutes.
Perhaps that’s why Palo Alto has more than 1,000 military customers at the end of the fourth quarter and about 80 of the Fortune 100 companies. Forty-seven percent of the Global 2000 also use Palo Alto’s three major platforms, including its Strata firewalls, secure Prisma edge and cloud platforms, and Cortex security operations center tools.
Palo Alto guided solid growth of 25.5% in fiscal year 2022 to $6.825 billion and free cash flow margins of around 32% to 33%, so it should also hold the blow in a rising interest rate environment. Actual profitability is lower, due to deferred revenue and upfront subscription payments, as well as high stock-based compensation.
However, on the conference call with analysts, CEO Nikesh Arora explained that equity compensation is currently higher than normal as Palo Alto has been quite active on the acquisition front over the past three years as it aimed to integrate new operations technologies from cloud and security to his credit. The founders of these acquired companies received four-year shares in Palo Alto Networks to compensate them for shares they were giving up in their own companies. However, Palo Alto is more or less complete with its acquisition frenzy, so as the company celebrates the fourth anniversary of those acquisitions, the stock mix is expected to decline over the next two years. In the meantime, the company has repurchased shares to offset some of this high stock compensation.
Overall, with heightened tensions between the developed world and Russia, Palo Alto appears to be benefiting from this new environment, even if interest rates are rising a bit.
An online marketplace for a new generation of entrepreneurs
Nicholas Rossolillo (Etsy): Etsy has been a scrappy underdog in the e-commerce arena for years. Confront well-established market places such as eBay and Amazon, the company has carved out a niche for itself with budding artisans and entrepreneurs looking for a place to sell online. As with everything in e-commerce, Etsy’s level of business skyrocketed when the pandemic hit, but it’s more than just a winner of 2020.
Full-year 2021 results are in, and Etsy said the value of goods sold (GMS) on Etsy.com and Reverb — its market for music gear — was more than $13.1 billion this year. last year. This represents a 28% year-over-year increase, excluding Etsy acquisition of Elo7 (the marketplace called “Etsy of Brazil”, with a GMS of $32 million) and Depop fashion market (GMS $294 million) last summer. The resulting annual revenue grew 35% and 16% in the fourth quarter, which is impressive given that Etsy saw a 129% increase in sales during the 2020 holiday shopping season.
Clearly, Etsy’s buyers and sellers stay loyal to the platform. New shoppers continue to arrive in droves looking for unique items, and Etsy is constantly improving its site and app through machine learning to help personalize the experience for buyers. Upping its game to help shoppers find the perfect item has done wonders for Etsy, and applying the same technology to Reverb when it was purchased in 2019 quickly transformed the music gear exchange into a place of choice for consumers. musicians to strike a deal on new and used gear. Etsy hopes to replicate this model of profitable growth for Elo7 and Depop in the years to come.
For the first quarter of 2022, management expects revenue to grow about 5% year-over-year as it tops out a quarter more of the early pandemic boom. An increase in seller transaction fees from 5% to 6.5% will take effect from April (Q2 2022), which Etsy says it is using to further invest in marketing and other seller tools. Shares now trade at 30 times company value for free movement of capital after the Q4 report. I remain optimistic about the long-term prospects of this online marketplace.
10 Stocks We Like Better Than Palo Alto Networks
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Anders Bylund owns Amazon. Billy Duberstein owns Amazon. Nicholas Rossolillo owns Etsy and Palo Alto Networks. The Motley Fool owns and endorses Amazon, Etsy, Palo Alto Networks and monday.com Ltd. The Motley Fool recommends eBay and recommends the following options: Short Calls April 2022 at $62.50 on eBay. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.