Amid the massive drop in tech stocks, investor moods might have reached their lowest levels since the financial crisis. The Nasdaq Composite has dropped by more than 25%, and many prominent growth tech stocks have fallen by more than 75% during this downturn.
However, such bear markets can actually benefit longer-term investors as they can now buy stocks at lower prices. This includes tech stocks such as Adobe (ADBE 1.64%), Zoom Video Communications (ZM -2.22%), and Alphabet (GOOGL 1.84%) (GOOG 1.79%), which now offer more compelling opportunities and potentially larger gains.
I regret not buying Adobe a decade ago. I’m not making the same mistake twice.
Jake Lerch (Adobe): Everyone loves a deal. Whether it’s just a few bucks or thousands of dollars, we all love the feeling that we’re saving money. It’s particularly true for investing. I’m always looking for stocks on sale. I’ll keep an eye on some companies for months — years even — waiting for the right time to pull the trigger.
Finally, last month, I got my chance with Adobe. It’s one of those companies I wish I had bought a decade ago. If I had invested $10,000 back in 2012, I’d be $118,000 richer today. Unfortunately, all I can do now is live and learn — and buy some shares of Adobe.
What I really love about Adobe is that it sits at the center of the digital economy. Businesses large and small rely on the company’s tools for content creation, marketing, and sales.
Adobe operates across three segments:
- Digital media
- Digital experience
- Publishing and advertising
All over the world, content creators, marketers, educators, and enthusiasts use Adobe’s various tools and platforms to produce the digital media we consume every day.
Despite its importance to the overall digital economy, Adobe’s stock has fallen on hard times this year. It’s down 29% year to date and 42% off its all-time high. The most recent blow came last month, when Adobe reported better-than-expected results but lowered full-year guidance due to — wait for it — negative foreign exchange impacts due to the strong U.S. dollar.
I’m not concerned about the strong dollar when it comes to Adobe. The company’s fundamentals remain strong. Its operating margin stands at 36%; it boasts a return on equity of 35%. Moreover, its free cash flow is at a record high of $6.9 billion.
Indeed, with the company trading at a near-record low price-to-earnings (P/E) ratio of 39.3, I’m hoping Adobe gives back some of its recent gains — so that I can get an even better deal.
From pandemic darling to discarded, this stock is a bargain
Justin Pope (Zoom Video Communications): COVID-19 turned the stock market into a roller coaster, where stocks plunged and then soared to lofty heights just months later. Zoom was a poster child for the pandemic stocks; lockdowns pushed people to communicate digitally, and Zoom’s growth and share price exploded.
You can see below that what’s gone up has come back down. Now, with Zoom putting up just 12% year-over-year revenue growth for the quarter ending April 30, 2022, is the goose cooked?
There’s plenty of evidence that Zoom’s got a lot left in the tank. First, don’t get too hung up on Zoom’s slow revenue growth. These are year-over-year calculations, and the company grew 191% in the same quarter a year earlier. It’s doubtful that a company will see its growth spike so much and follow up with the same momentum a year later.
Zoom still managed to grow on top of that stellar period instead of giving back revenue. This could be a sign that Zoom’s success resulted from actual market demand pulling long-term growth into the short term, versus Zoom being some flukey fad that dies as soon as the pandemic passes.
And Zoom is highly profitable, unlike many growth stocks that have seen 50% or more haircuts in this bear market. The company is piling up free cash flow and net income, bolstering a balance sheet that carries $5.7 billion in cash, a whopping 18% of its market cap, against zero debt.
I wouldn’t be surprised to see growth pick back up once Zoom gets past these formidable comparable growth figures, but it doesn’t have to do much moving forward. The stock now trades at a price-to-earnings ratio (P/E) of just 26, which looks pretty reasonable for a growth stock with years of potential growth ahead and the option to increase its share repurchases if desired.
Add it all together, and Zoom seems like a fundamentally sound business that trades at a great price today. Investors could look back on this bear market as an opportunity to scoop up shares.
Google investment opportunity in this search company
Will Healy (Alphabet): Now that the Google parent Alphabet has completed its long-awaited 20-for-1 stock split, it might be the time to consider the search engine and advertising giant. Although it does not pay a dividend, Alphabet offers nearly everything value-conscious investors seek in a stock.
First is its business. Its dominant search engine and popular YouTube platform paved the way for it to become an advertising giant and cash cow. It has used these resources to improve its capabilities in AI, machine learning, and numerous other applications that involve it in multiple subsectors of the tech industry.
However, if the last few earnings reports show any indications, it appears Google Cloud will become its next major cash cow. In the first quarter of 2022, Google Cloud reported revenue growth of 44% versus 23% for Alphabet as a whole.
Alphabet also holds about $140 billion in liquidity, a factor that gives it optionality bolstered by one of the strongest balance sheets in the industry. Also, since it generated $15 billion in free cash flow in the first quarter alone, that cash hoard may grow further.
Admittedly, Alphabet is not immune to the bear market. Since November, its stock has fallen by about 25%, a performance that has approximately paralleled the S&P 500.
But given its revenue growth, it may have become undervalued. Alphabet sells at a 21 P/E ratio, its lowest valuation since 2014. It also trades at a significantly lower multiple than cloud competitors Amazon and Microsoft, which sell for 59 times and 27 times earnings, respectively.
While some investors may feel down on tech stocks now, Alphabet has given them few reasons to doubt its prominent position in the tech industry or its future. At 21 times earnings, buying this stock will likely lift investor returns — as well as investor moods — over time.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jake Lerch has positions in Adobe Inc., Alphabet (C shares), and Amazon. Justin Pope has no position in any of the stocks mentioned. Will Healy has positions in Zoom Video Communications. The Motley Fool has positions in and recommends Adobe Inc., Alphabet (A shares), Alphabet (C shares), Amazon, Microsoft, and Zoom Video Communications. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool has a disclosure policy.