The tech sector, which helped Wall Street shrug off the coronavirus-induced short bear market and formed the new bull market, suffered a bloody blow in early 2022. Record inflation forced the Fed to become ultra-hawkish with stricter measures. liquidity control and higher interest rate regime. The bloodbath in the technology sector has continued since the start of the year.
However, the valuation of this sector has been substantially corrected. The Technology Select Sector SPDR (XLK) – one of 11 major sectors in the S&P 500 index – has fallen 25.5% since the start of the year. The tech-heavy Nasdaq composite index has plunged 29.8% year-to-date and is currently in a 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 – free report), Datadog Inc. (DOG – free report), Ceridian HCM Management Inc. (CDAY – free report), Cloud Flare Inc. (REPORT – free report) and Unity Software Inc. (you – free report),
Positive development
Although the Fed has yet to signal a change from its ultra-hawkish monetary policies, some Fed officials have recently spoken in a relatively dovish tone. Minutes from the Fed’s November FOMC meeting revealed that a “substantial majority” of Fed officials favored 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 could rise above 5% as previously estimated and that a soft landing for the economy may not materialize. . However, with several key Fed officials expressing their dovish views recently, market participants expect the terminal interest rate not to breach the 5% threshold.
High-growth companies, especially technology companies, depend on easy access to cheap credit to grow their businesses. Therefore, a reduction in the magnitude of the Fed’s interest rate hike will be a welcome development for the tech sector.
Additionally, lower market risk-free returns mean a lower discount rate for future cash flows from equity investments. This will increase investors’ net present value from their investment in growth stocks.
Our top picks
We narrowed our search to five large-cap internet stocks (market capital >$10 billion) that have plunged 35% since the start of the year. Equities have strong growth potential for 2023 and have seen a positive earnings estimate revision for next year over the past 30 days. Each of our picks carries a Zacks rank #2 (buy). You can see the full 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 banking on an improvement in the travel industry. The continued resumption of long-distance and cross-border travel due to reduced travel restrictions is benefiting ABNB’s Nights & Experience bookings. In addition, growth in average daily rates and gross booking value is a tailwind.
Growth in active listings in Latin America, North America and EMEA is contributing well to revenue. Growing sales and marketing initiatives as well as ongoing efforts to upgrade various aspects of Airbnb’s service are helping the company gain momentum with hosts and travelers.
Airbnb forecasts a revenue and profit growth rate of 13.3% and 15.6%, respectively, for next year. The Zacks consensus estimate for next year’s revenue has improved 6.8% over the past 30 days. ABNB’s share price has fallen 42.7% since the start of the year.
Datadog benefits from the addition of new customers and increased adoption of its cloud-based monitoring and analytics platform, driven by accelerated digital transformation and cloud migration across organizations.
Solid adoption of Synthetics and Network Performance Monitoring products should help DDOG win customers in the near term. Contributions from a strong base of cloud partners, including Google Cloud, Microsoft Azure, and Amazon Web Services, remain DDOG’s primary growth engine, in addition to an expanding portfolio.
Datadog forecasts revenue and profit growth rates of 33% and 17.4%, respectively, for next year. Zacks’ consensus estimate for next year’s revenue has improved 10.5% over the past 30 days. DDOG’s stock price has fallen 59.6% since the start of the year.
MCH Ceridian is a human capital management (HCM) software company in the United States, Canada and abroad. CDAY offers Dayforce, a cloud-based HCM platform that provides human resources, payroll, benefits, labor and talent management functionality, and Powerpay, a cloud-based HR and payroll solution for the small business market. Ceridian HCM also provides desktop solutions for payroll and payroll-related services. CDAY sells its solutions through a direct sales force and third-party channels.
Ceridian HCM forecasts revenue and profit growth rates of 17.4% and 27.2%, respectively, for next year. The Zacks consensus estimate for next year’s revenue has improved 9.8% over the past 30 days. CDAY’s stock price has fallen 38.7% since the start of the year.
Cloudy provides an integrated cloud-based security solution to secure a range of platform combinations, including public cloud, private cloud, on-premises applications, software as a service, and IoT devices worldwide .
NET’s security products include 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. Additionally, NET provides reliability solutions including load balancing, anycast network, virtual backbone, DNS, DNS resolver, online and virtual waiting rooms solutions.
Cloudflare forecasts a revenue and profit growth rate of 35.6% and 35.4%, respectively, for next year. Zacks’ consensus estimate for next year’s revenue has improved more than 100% in the past 30 days. NET’s stock price has fallen 66.1% since the start of the year.
Unit Software provides a platform to create and operate real-time interactive 3D content. U’s platform provides a set of software solutions to create, run and monetize real-time interactive 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, 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 United Kingdom.
Unity Software forecasts revenue and profit growth rates of 60.1% and over 100%, respectively, for next year. Zacks’ consensus estimate for next year’s revenue has improved more than 100% in the past 30 days. U’s share price has plunged 74.8% since the start of the year.
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