By Daniel Newman
Shares of technology companies from chip makers to FAANGs slumped for a third quarter at the end of September, as softer revenue, profit warnings and fading CEO confidence added to the doom.
The backdrop is a widely expected economic recession next year, caused, in part, by aggressive Federal Reserve interest-rate increases to squash inflation.
The current state of play is complex. However, buying attractive assets during repressed markets presents a tremendous opportunity. And history also shows that bear markets tend to turn over once greater certainty about policy is evident, making times like now a potential profitable moment to get constructive and buy companies with excellent long-term prospects.
Technology will return to prosperity, and some names will likely perform well even if the market stays down for some time.
I believe four trends — automation, artificial intelligence (AI), cloud and cybersecurity — will continue to see robust demand in even the most challenging economic circumstances. Investors ought to be playing the long game. Here’s a spotlight on four companies in those spaces.
Companies that want to reduce headcount and optimize for the short term will slow hiring and turn to automation to do more with less. ServiceNow /zigman2/quotes/202729495/composite NOW -0.79% enables companies to leverage existing IT and software to build automation for not just network and IT but operational tasks, HR and other business processes. Under CEO Bill McDermott, ServiceNow has consistently delivered above the rule of 40 (that a software company’s combined growth rate and profit margin should exceed 40%), and the company’s long-term growth expectations continue to be robust even with the toughening economic situation. Companies looking to automate will be turning to ServiceNow, giving it a higher probability of seeing continued strong earnings growth during periods of economic contraction. The company’s shares are down 35% this year, more than the Nasdaq Composite Index’s 29% decline.
Analytics and AI
For some, a Warren Buffett investment in a young company like Snowflake /zigman2/quotes/220991541/composite SNOW +0.81% may be enough to lure 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 well-known player in the cloud data warehouse space, sitting at under a $2 billion run rate today. I see the sector as fast-growing, and I think the privately held Databricks, MongoDB /zigman2/quotes/203302825/composite MDB -2.71% and Oracle /zigman2/quotes/202180826/composite ORCL -0.65% are well-positioned. Still, Snowflake has a strong tailwind backed by about a 170% net dollar retention, rapidly decreasing customer acquisition costs and 97% gross dollar retention. The stock is down 45% this year.
Oracle benefits from having a massive installed customer base over many years, which has pushed its cloud portfolio to over $10 billion a year. Still a vast distance between the company and the likes of Amazon’s /zigman2/quotes/210331248/composite AMZN -3.03% AWS and Microsoft’s /zigman2/quotes/207732364/composite MSFT -2.03% Azure, Oracle saw the fastest cloud growth this past quarter. I believe its large install base is a significant opportunity for workload migration to Oracle’s Gen 2 cloud. With its aggressive pricing strategy, Oracle has won more deals for its Cloud Infrastructure business, which drove 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, steadily growing in the high 20% to lower 30%. The cloud should do well as companies seek out pay-per-use technology to manage expenses. I expect Oracle to capitalize on this short-term while continuing to deliver steady results and a dividend for investors who appreciate higher yield. Shares of Oracle have dropped 25% this year.
Cybersecurity investments really can’t wait out an economic downturn, so I like several plays for cybersecurity, from Cisco /zigman2/quotes/209509471/composite CSCO -1.50% and Juniper Networks /zigman2/quotes/207361368/composite JNPR -1.17% to Crowdstrike /zigman2/quotes/212513426/composite CRWD -3.80% and Cloudflare /zigman2/quotes/214109260/composite NET +0.81% . However, I like Palo Alto Networks /zigman2/quotes/207599953/composite PANW -1.94% the best at this moment for its recent strong performance and its acute focus on cybersecurity with both legacy architecture and modern IT networks (next-generation services), which it gained competency via a series of acquisitions under CEO Nikesh Arora. With its recent quarter delivering 27% growth and the company once again finding profitability, it feels like this downturn could be a big opportunity for Palo Alto Networks as demand for cybersecurity technology will continue to swell 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, advising or consulting to ServiceNow, IBM, Nvidia, Meta Platforms, Oracle, MongoDB, Cisco, Juniper and dozens of other technology companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.