- Rising interest rates, accelerating inflation, and a slowing economy dent sentiment
- High-growth technology stocks are the worst-performing group of the year
- Tech selloff has created buying opportunities in a few former market darlings
With less than two months to go until the end of 2022, stocks on Wall Street are on track to suffer one of their worst annual performances in history. Investor sentiment has been dominated by fears over the Federal Reserve’s aggressive rate hikes to combat persistently high inflation, which could potentially tip the economy into recession.
The blue-chip Dow Jones Industrial Average is down 15.9% year-to-date (ytd), while the S&P 500 and the tech-heavy Nasdaq Composite are off by 21.8% and 31.7% respectively.
Despite the turmoil, I believe that ServiceNow (NYSE:NOW) and Cloudflare (NYSE:NET) are poised for a strong rally given the robust demand outlook for their innovative tools and services.
The two out-of-favor growth stocks have plenty of room to expand their respective businesses, making them solid long-term investments. NOW and NET are well worth considering at these depressed levels as the beaten-down sector attempts to bounce back from its selloff.
ServiceNow
- Earnings Date: Wednesday, Oct. 26 after the close
- Year-To-Date Performance: -45%
- Market Cap: $71.7 billion
Given the fragile sentiment on many top-rated technology companies, especially the high-growth software sector, ServiceNow shares have come under heavy selling pressure, hitting a series of fresh 52-week lows recently.
NOW stock fell to $337.21 on Oct. 13, its lowest level since May 2020; it ended Tuesday’s session at $356.79. It is roughly 50% below its all-time peak of $707.60 touched in November 2021.
The 45% ytd decline has created a solid entry point in the beaten-down name given its solidified status as an industry leader in a high-growth market.
The Santa Clara, California-based software giant provides tools that help other businesses track and manage digital workflows for enterprise operations. It boasts a 99% customer renewal rate as businesses accelerate cloud migration and enterprise digitalization trends.
ServiceNow reported better than expected Q2 profit at the end of July but disappointed on its annual guidance.
NOW has either matched or topped Wall Street’s profit expectations in every quarter dating back to when it went public in Q2 2014, highlighting the strength and resilience of its business.
Investors will keep an eye on the update on enterprise customer additions as it surpassed 100 customers paying over $10 million in annual contract value in Q2, representing annualized growth of more than 50%.
Wall Street has a long-term bullish view on ServiceNow’s stock, with 32 out of 37 analysts surveyed by Investing.com rating it as a ‘buy’.
Cloudflare
- Earnings Date: Thursday, Nov. 3 after the close
- Year-To-Date Performance: -59.6%
- Market Cap: $17.3 billion
Cloudflare, which provides web security and infrastructure services, has fallen out of favor this year amid a general tech selloff.
After rallying to a record high of $221.64 in November 2021, NET stock, which is down a whopping 59.6% ytd, tumbled rapidly to a low of $38.96 on June 16. Cloudflare shares have since staged a mild rebound, closing at $53.09 on Tuesday, but they still stand roughly 76% below their all-time peak.
The San Francisco, California-based cybersecurity specialist has a market cap of $17.3 billion compared to roughly $50 billion at its peak.
The extreme selloff in Cloudflare stock has created a compelling buying opportunity considering the robust demand for its networking and cybersecurity tools amid the current geopolitical backdrop.
Cloudflare raised full-year guidance after shattering its sales record in the second quarter. It has beaten Wall Street’s sales estimates for 12 consecutive quarters, a streak that goes back since the company went public in September 2019, reflecting surging demand for its products
According to Investing.com, Cloudflare is forecast to deliver breakeven earnings per share for the third quarter. Revenue is expected to jump 45.4% yoy to $250.6 million, defying a slowdown in other parts of the cloud software industry.
Investors will keep an eye on Cloudflare’s large customer count. The cybersecurity company said the number of clients that spend at least $100,000 annually jumped nearly 61% yoy to 1,749 in Q2.
An Investing.com survey revealed that all 25 analysts covering NET rated it as either a ‘buy’ or ‘hold’.
Disclosure: At the time of writing, Jesse is long on the S&P 500 and Nasdaq via the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ). He is also long on the Technology Select Sector SPDR ETF (XLK) and the WisdomTree Cloud Computing ETF (WCLD). The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.