The Nasdaq Composite index is up by around 18% in 2024 and has made a fresh record high in July 2024. Not surprisingly, many technology stocks, especially the giants, saw impressive gains.
However, the technology-heavy index showed some weakness in the week ending July 19. Investors have been rotating out of mega-cap technology stocks into smaller companies after a soft U.S. inflation report for June increased the possibility of upcoming interest rate cuts. Investors are also concerned about the Biden administration potentially imposing tougher trade restrictions on China, which can adversely affect the technology titans.
In such a macroenvironment, a few technology companies still offer impressive upside potential in the long run due to their sound fundamentals and robust financials. The current price weakness can also be an attractive entry point for investors. Here’s why these are compelling picks for astute investors.
Zscaler
The first no-brainer stock to buy now is cybersecurity specialist Zscaler (NASDAQ: ZS). Once a stock market darling, Zscaler has been feeling the heat from slowing top-line growth, increasing competition, and elevated interest rates. Despite these headwinds, there are multiple reasons to like the stock.
Zscaler is a leading player in the zero-trust security market — a security architecture that involves not trusting anyone, including the company’s CEO. The company’s security service edge (SSE) platform consists of multiple cloud-native network security services, which verify the credentials of every user and device, accessing internal resources and cloud services. The mission-critical nature of these cybersecurity services becomes evident when you consider that the annual cost of cybercrime is expected to reach a mind-boggling $10.5 trillion by 2025.
Zero-trust security is superior to the traditional perimeter-based security approach in the current cloud and artificial intelligence (AI)-driven world. It enables clients to scale and maintain network security services more cheaply and easily, without significant on-site management. Furthermore, organic innovations and acquisitions expanded Zscaler’s presence in areas like branch security, vulnerability management, and security operations. The company is also leveraging artificial intelligence capabilities to strengthen its cloud security offerings in areas such as monitoring digital experiences, protecting sensitive data in public clouds, and ensuring visibility and control over generative AI applications.
Zscaler’s innovative and robust security offerings continue to play a key role in driving revenue and billings growth. Revenue grew by 32% year over year to $553 million, while billings were up by 30% to $628 million in the third quarter of fiscal 2024 (ended March 31, 2024). While this growth is slower than 46% revenue growth and 40% billings growth seen in the same quarter of the prior year, this slowdown is a normal trend as a company moves through its corporate lifecycle. However, the company is seeing significant improvement in profitability. Operating profit doubled in the third quarter from a year ago, while operating margin reached a record high of 22%. The company also become profitable under generally accepted accounting principles (GAAP) for the first time.
Zscaler saw customers contributing over $1 million in annual recurring revenue (ARR) grow 31% from a year ago to 523 in the third quarter. The company also reported over 50 customers with ARR exceeding $5 million in the third quarter. The company’s ability to land large enterprise clients indicates its potential to withstand economic fluctuations. Zscaler also witnessed several of its existing customers increasing their spending on the company’s platform over time.
Zscaler is currently trading at 14 times trailing 12-month sales. Although not cheap, it is lower than the company’s historical three-year average price-to-sales (P/S) ratio of 22.4x.
Zscaler is currently targeting a serviceable addressable market worth $96 billion. Hence, considering the company’s annual run rate of just around $2.2 billion and its shift toward GAAP profitability, it may make sense to pick up at least a small stake in this top-notch cybersecurity stock.
Adobe
The second stock expected to become a smart long-term investment is leading digital content creation player Adobe (NASDAQ: ADBE). Widely famous for its industry-standard software Photoshop, Illustrator, Lightroom, and Premiere Pro, Adobe has built a strong moat among digital businesses and content creator communities. The company’s suite of cloud-based products, which includes Creative Cloud, Experience Cloud, and Document Cloud, offers a one-stop solution to enterprises for their creative and marketing needs.
Adobe built a strong brand and loyal customer base among the creative community over decades. Adobe’s network effect is also a powerful driver since the collaboration and compatibility value of its creative, document, and experience tools and services increases as more and more customers engage with these products.
Adobe also made significant investments in AI-powered initiatives, to expand its addressable market and further improve monetization of its large user base. The company trained Firefly, a family of creative generative AI models, with its proprietary data sets and has integrated it with its flagship products. Firefly helped improve user engagement and has been used to create 9 billion images since its launch across the company’s creative tools. The integration of Firefly capabilities is driving users to opt for more premium plans, which in turn is driving up the company’s average revenue per user.
Adobe’s stock gained over 20% since the company came out with solid results for the second quarter of fiscal 2024 (ending May 31, 2024). Revenue soared 11% year over year to $5.31 billion, while non-GAAP (adjusted) earnings per share (EPS) was up 15% to $4.48. The company has also raised its fiscal 2024 revenue and EPS guidance.
Despite the recent share price gains, Adobe is currently trading at 12.1 times trailing 12-month sales, lower than its historical three-year average P/S ratio of 13.1x. Considering the company’s many growth catalysts and reasonable valuation, it seems a worthwhile investment now.
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Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Zscaler. The Motley Fool has a disclosure policy.
Tech Bull Market: 2 No-Brainer Stocks to Buy Hand Over Fist Now was originally published by The Motley Fool
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