The technology sector, which enabled Wall Street to get rid of the coronavirus-induced short bear market and formed the new bull market, suffered a bloody blow at the start of 2022. Record-high inflation compelled the Fed to turn ultra-hawkish with tighter liquidity control and a higher interest rate regime. The blood bath in the technology sector has continued year to date.
However, the valuation of this sector has been corrected significantly. The Technology Select Sector SPDR (XLK) — one of the 11 broad sectors of the S&P 500 Index — has tumbled 25.5% year to date. The tech-heavy Nasdaq Composite Index has plunged 29.8% year to date and is currently in bear market.
We have selected five Internet-based stocks that were heavily shorted in 2022. However, these stocks have strong growth potential for 2023 supported by a favorable Zacks Rank. These companies are - Airbnb Inc. ABNB, Datadog Inc. DDOG, Ceridian HCM Holding Inc. CDAY, Cloudflare Inc. NET and Unity Software Inc. U,
Although the Fed is yet to signal any shift from its ultra-hawkish monetary policies, a section of Fed officials recently spoke in a relatively dovish tone. The minutes of the Fed’s November FOMC meeting revealed that a “substantial majority” of Fed officials favor reducing the magnitude of the interest rate hike going forward.
In his post-FOMC statement in November, Fed Chairman Jerome Powell warned that the terminal interest rate might go beyond 5% as estimated earlier and a soft landing of the economy may not be realized. However, with several important Fed officials recently expressing their dovish views, market participants expect that the terminal interest rate may not cross the 5% threshold.
High-growth-oriented companies, especially technology companies, depend on easy access to cheap credit to expand their businesses. Therefore, a reduction of the magnitude of the interest rate hike by the Fed will be a welcome development for the technology sector.
Moreover, lower market risk-free returns mean a lower discount rate for future cash flows from stock investing. This will increase the net present value of the investors from their investment in growth stocks.
Our Top Picks
We have narrowed our search to five large-cap (market capital >$10 billion) Internet-based stocks that have plunged 35% year to date. The stocks have strong growth potential for 2023 and have sAeen positive earnings estimate revision for the next year in the past 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Airbnb is riding on an improvement in the travel industry. Continued recovery in both longer-distance and cross-border travel owing to a reduction in travel restrictions is benefiting ABNB’s Nights & Experience bookings. Additionally, growth in average daily rates and gross booking value is a tailwind.
Growing active listings in Latin America, North America and EMEA are contributing well to the top line. Growing sales and marketing initiatives along with continuous efforts to upgrade various aspects of the Airbnb service are helping the company gain momentum among hosts and guests.
Airbnb has an expected revenue and earnings growth rate of 13.3% and 15.6%, respectively, for the next year. The Zacks Consensus Estimate for next-year earnings has improved 6.8% over the past 30 days. The stock price of ABNB has tanked 42.7% year to date.
Datadog is benefitting from new customer additions and increased adoption of its cloud-based monitoring and analytics platform driven by accelerated digital transformation and cloud migration across organizations.
The solid adoption of Synthetics and Network Performance Monitoring products are expected to aid customer wins for DDOG in the near term. Contributions from a solid cloud partner base, including Google Cloud, Microsoft Azure and Amazon Web Services, remain the key growth driver for DDOG besides an expanding portfolio.
Datadog has an expected revenue and earnings growth rate of 33% and 17.4%, respectively, for the next year. The Zacks Consensus Estimate for next-year earnings has improved 10.5% over the past 30 days. The stock price of DDOG has tumbled 59.6% year to date.
Ceridian HCM operates as a human capital management (HCM) software company in the United States, Canada, and internationally. CDAY offers Dayforce, a cloud HCM platform that provides human resources, payroll, benefits, workforce management, and talent management functionality and Powerpay, a cloud HR and payroll solution for the small business market. Ceridian HCM also provides Bureau solutions for payroll and payroll-related services. CDAY sells its solutions through a direct sales force and third-party channels.
Ceridian HCM has an expected revenue and earnings growth rate of 17.4% and 27.2%, respectively, for the next year. The Zacks Consensus Estimate for next-year earnings has improved 9.8% over the past 30 days. The stock price of CDAY has slid 38.7% year to date.
Cloudflare provides an integrated cloud-based security solution to secure a range of combination of platforms, including public cloud, private cloud, on-premise, software-as-a-service applications and IoT devices worldwide.
NET’s security products comprise cloud firewall, bot management, distributed denial of service, IoT, SSL/TLS, secure origin connection, and rate limiting products. Cloudflare offers performance solutions, which include content delivery and intelligent routing, as well as content, mobile, and image optimization solutions. In addition, NET provides reliability solutions comprising load balancing, anycast network, virtual backbone, DNS, DNS resolver, online, and virtual waiting room solutions.
Cloudflare has an expected revenue and earnings growth rate of 35.6% and 35.4%, respectively, for the next year. The Zacks Consensus Estimate for next-year earnings has improved more than 100% over the past 30 days. The stock price of NET has plummeted 66.1% year to date.
Unity Software provides a platform for creating and operating interactive, real-time 3D content. U’s platform provides a set of software solutions to create, run and monetize interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles and augmented and virtual reality devices.
Unity Software enables content creators and developers, artists, designers, engineers, and architects to create interactive and real-time 2D and 3D content. U offers its solutions directly through its online store, field sales operations, independent distributors, and resellers in the United States, Denmark, Belgium, Canada, China, Colombia, Finland, France, Germany, Ireland, Israel, Japan, Lithuania, Portugal, Singapore, South Korea, Spain, Sweden, Switzerland, and the United Kingdom.
Unity Software has an expected revenue and earnings growth rate of 60.1% and more than 100%, respectively, for the next year. The Zacks Consensus Estimate for next-year earnings has improved more than 100% over the past 30 days. The stock price of U has plunged 74.8% year to date.
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