DocuSign (NASDAQ:DOCU) and Atlassian (NASDAQ:TEAM) are two tech stocks with really high valuations. However, these stocks are likely to grow into these valuations given that their software has become integral to many corporations.It’s been an impressive stretch for the Nasdaq-100 (QQQ), with the index up more than 6% for the month of June, pushing the index to a 12% return year-to-date, after already lapping an incredible 47% return last year. While the index is not yet overbought, as shown below, we continue to have high levels of complacency, and the Nasdaq Composite is now nearing overbought levels. This doesn’t mean that the market can’t go higher from here, but it does suggest elevated risk for starting new positions, with the best course of action being to wait for a dip to add exposure to the market. For investors patient to wait for a dip, two names look to be solid buy-the-dip candidates if we do see some weakness this summer. Both names sport double-digit compound annual EPS growth rates and are leaders in their industry with high double-digit sales growth, making them ideal candidates to put at the top of one’s shopping list.
(Source: TC2000.com)
DocuSign (DOCU) and Atlassian (TEAM) have underperformed the Nasdaq Composite over the past six months, with the Software Sector lagging the Nasdaq Composite after an impressive rally off the March 2020 lows. While this underperformance has been a little disappointing, it’s to be expected, as even the best growth stocks need time to build new bases after a triple-digit performance in less than a year. The good news is that these multi-month consolidations have allowed DOCU and TEAM to grow into their valuations a little, with TEAM now trading at 131x FY2023 annual EPS estimates and DOCU trading at 102x FY2024 annual EPS estimates. These are not cheap valuations by any means, which trades at a deep discount to peers currently. However, for high growth stories with 75% plus margins like this, I would expect further weakness to improve valuations should present a buying opportunity, given how strong these names acted during the recent correction.