Shares of tech companies from chipmakers to the FAANG fell for a third straight quarter in late September, as weak revenue, profit warnings and waning CEO confidence compounded the doom.
The backdrop is a widely expected recession next year, driven in part by the Federal Reserve’s aggressive interest rate hikes to curb inflation.
The current state of the game is complicated. However, buying attractive assets in a depressed market is a huge opportunity. History also shows that bear markets tend to reverse once policy certainty increases significantly, making times like the present a potentially favorable time to be constructive and buy companies with good long-term prospects.
Technology will return to boom, and some names may perform well even if the market is down for a while.
I believe that the four trends of automation, artificial intelligence (AI), cloud computing and cybersecurity will continue to see strong demand even in the most challenging economic environments. Investors should play the long game. Below is a focus of four companies in these areas.
Workflow Automation
Companies that want to reduce headcount and optimize in the short term will slow hiring and turn to automation to do more with less. serving now,
Enables companies to leverage existing IT and software to build automation for networking and IT, as well as operational tasks, human resources, and other business processes. Under CEO Bill McDermott, ServiceNow has remained consistently above 40 (software companies should have combined growth and profit margins in excess of 40%), and the company’s long-term growth expectations remain strong even in a tough economy. Companies looking to automate will turn to ServiceNow, making it more likely to see continued strong earnings growth during economic contractions. Shares of the company are down 35% this year, outpacing the Nasdaq Composite’s 29% drop.
Analytics and Artificial Intelligence
For some, Warren Buffett’s investments in young companies like Snowflake,
may be enough to attract investors. But the most compelling reason is that companies are investing in intelligent analytics services to enable better business decisions and support better customer experiences. From 2021 to 2026, the cloud data warehouse market is expected to grow at a compound annual growth rate (CAGR) of 31% to reach $39 billion, with Snowflake being the most prominent player in the cloud data warehouse space, below $2 billion today billion running speed. I think the industry is growing fast, I think privately held Databricks, MongoDB MDB,
and Oracle ORCL,
Great location. Nonetheless, Snowflake had strong tailwinds, supported by about 170% net dollar retention, rapidly decreasing customer acquisition costs, and 97% gross dollar retention. The stock is down 45% this year.
cloud
Over the years, Oracle has had a large customer base that has made its cloud portfolio more than $10 billion a year. There’s still a big gap between the company and the likes of Amazon’s AMZN,
AWS and Microsoft MSFT,
Azure, Oracle saw the fastest cloud growth in the past quarter. I believe its large installed base is a significant opportunity for workload migration to Oracle Gen 2 Cloud. With its aggressive pricing strategy, Oracle has won more deals for its cloud infrastructure business, which drove more than 50% growth in its most recent quarter. The company also has a strong software-as-a-service (SaaS) portfolio, including Netsuite and Fusion, which has grown steadily from the low 20s to 30s. The cloud should do well as companies look to pay-per-use technologies to manage expenses. I expect Oracle to capitalize on this short-term opportunity while continuing to deliver solid results and a dividend for investors who appreciate higher yields. Oracle’s stock is down 25% this year.
cyber security
Cybersecurity investments really can’t wait for a recession, so I like a couple of Cisco CSCO’s cybersecurity investments,
and Juniper Networks JNPR,
to Crowdstrike CRWD,
and Cloudflare NET,
However, I like Palo Alto Networks PANW,
The best performer at the moment is its recent strong performance and strong focus on cybersecurity for legacy architectures and modern IT networks (next-generation services), which it has acquired through a series of acquisitions by CEO Nikesh Arora. With 27% growth in the most recent quarter and the company turning profitable again, it feels like this downturn could be a huge opportunity for Palo Alto Networks as the company faces greater pressure to protect its data and network, Demand for cybersecurity technology will continue to grow. Shares of the company are only down about 4% this year.
Daniel Newman is a principal analyst at Futurum Research, a company that provides or has provided research, analysis, advice or consulting for ServiceNow, IBM, Nvidia, Meta Platforms, Oracle, MongoDB, Cisco, Juniper and dozens of other technology companies. Neither he nor his company hold any equity in the companies cited.follow him on twitter@danielnewmanUV.