Tech Stock Correction: 3 Stocks to Buy on the Dip

Technology stocks have led the market correction in 2022. Investors have been spooked by rising inflation and upcoming interest rate hikes. The tech market was also red-hot for much of 2021, and some of that euphoria was priced in. The international tension caused by Putin’s invasion of Ukraine has caused more uncertainty, and volatility has been high. The tech-heavy Nasdaq has recovered from its year-to-date (YTD) lows, but remains over 8% down in 2022. The companies below have posted impressive results, which could lead to market outperformance.

Salesforce

According to IDC, in 2024, companies will spend over $1 trillion on Future of Work technologies, and 57% of total technology spending will be for digital transformation. This offers a tremendous opportunity for continued growth for Salesforce (CRM). Salesforce is a customer-relationship-management software leader and expects a total addressable market of $248 billion by 2025. Its Customer 360 platform connects company departments and data in a single platform allowing companies to serve customers better. The platform also facilitates “work from anywhere,” which has become a must. 

The acquisition of Slack, completed in 2021, is another reason for optimism. Salesforce has a terrific track record of success in mergers and acquisitions. For example, MuleSoft was acquired in 2018. At that time, it was producing $284 million in annual revenues. Since then, annual revenues have increased 4x, and the segment is growing at 44% as of the first half of fiscal 2022. Other recent acquisitions show similar results, which bodes incredibly well for the future of Slack. 

Salesforce has seen consistently increasing sales and cash flow from operations (CFO) and expects to increase each another 21% in FY 2023. This will bring sales to over $32 billion and CFO to over $7.2 billion. The stock is down nearly 30% from its 52-week high. As shown below, the sell-off may be overdone as it now trades for a lower price-to-sales (P/S) ratio than before the pandemic. This may be the opportunity patient investors have waited for.

Alphabet

Sometimes the obvious choice can be the best choice. This may be the case with Alphabet (GOOG) (GOOGL) as it prepares for a 20:1 stock split in July of 2022. This split announcement has been overshadowed by the recent news of split plans at Amazon and Tesla; however, it could be impactful. The split could pave the way for inclusion in the Dow Jones Industrial Average. Because of the way the Dow index is calculated, a stock that trades for thousands of dollars per share could not reasonably be included-it would make up way too much of the index. Alphabet stock would be in the price range to be included after the planned split. Stocks included in the Dow index enjoy increased demand due to the many funds that follow the index.

Alphabet posted terrific results in 2021, with sales rising 41% to $258 billion. The company also raised the operating margin to 31% and produced $112.2 in diluted earnings per share, an increase of 91% over 2020. Google’s advertising business continues to be the company’s bread and butter. YouTube ad sales were excellent, with 46% growth in 2021.

The Google Cloud is also growing prolifically, producing $19 billion in revenue on 47% growth in 2021. The company’s recent acquisition of Mandiant will enhance the company’s ability to provide cybersecurity solutions in the cloud. 

Alphabet continues to support shareholders with massive stock buybacks. Throughout 2020 and 2021, over $81 billion worth of shares were retired, more than 4% of the current market cap. The stock is currently trading at a price-to-earnings (P/E) ratio of just 26, lower than it has traded since the pandemic crash, which may be an opportunistic entry point for long-term investors.

Palo Alto

Cybersecurity has been back in the news as governments warn businesses and critical infrastructure to be hyper-alert due to potential Russian cyberattacks against the West. The cyber threat is constant, and enterprises must be prepared. Cloud security is in demand as more and more businesses are making the switch. Palo Alto Networks (PANW) is a leader in the industry, providing network and cloud security products.  

Palo Alto has a tremendous TAM that will reach $85 billion in 2022. The company is increasing its product offerings to capitalize, releasing 29 major products in fiscal 2021. Second-quarter fiscal 2022 sales were strong at $1.3 billion on 30% growth, and billings were even better at $1.6 billion on 32% growth. The company also increased its complete fiscal 2022 guidance to at least $5.4 billion in sales and $6.8 billion in billing. 

The stock has gained over 90% over the last year and trades close to its 52-week high. However, its P/S ratio still lags many peers, and Palo Alto may continue to reward long-term shareholders.

Originally published on Fool.com

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Bradley Guichard owns Alphabet (C shares), Amazon, and Palo Alto Networks. The Motley Fool owns and recommends Alphabet (A shares), Amazon, Palo Alto Networks, Salesforce.com, and Tesla. The Motley Fool recommends Alphabet (C shares). The Motley Fool has a disclosure policy.

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