With the bear market we're in right now (when the market falls 20% or more), there is a lot of skepticism about the future. However, if investors can broaden their investing horizon beyond the next 10 months (the average bear market lasts 9.6 months), they can purchase several incredible values at bargain prices.
Here is my list of five great buys during today's bear market.
1. Shopify
First off is Shopify (SHOP 1.42%). This software provider gives entrepreneurs the tools to open and maintain an e-commerce business. Shopify charges its users a monthly fee for its software and takes a slice of each transaction that goes through its customer's website.
Shopify made huge business gains during the pandemic, with gross merchandise volume rising 57% annually over two years to $43.2 billion. But, even with first-quarter revenue growth of 22%, the market is worried about a business slowdown. As a result, the stock now sits more than 80% down from its all-time high.
NASDAQ: SHOP
Key Data Points
How does a company that boomed during the pandemic and will maintain its revenue after the boom have a stock price that is below pre-pandemic levels? Extreme expectations. Shopify's valuation got ahead of itself when the stock traded for more than 60 times sales. Now the stock hovers around a much more reasonable nine times sales. However, the market may have overcorrected as Shopify's valuation is near an all-time low.
Shopify's product isn't going away anytime soon, and investors should scoop up the stock while the pessimism remains high.
2. Datadog
As businesses become more complex through cloud technologies, IT teams are having difficulty ensuring each program feeds each other correctly and functions properly. Datadog (DDOG 3.31%) assists with this through cloud monitoring as a service. With its intelligent software, Datadog can detect and solve problems before anyone can notice, providing unparalleled response time compared to manual intervention.
Datadog has been growing rapidly, with Q1 revenue rising 83% year-over-year. Additionally, Datadog is profitable from a GAAP (generally accepted accounting principles) basis and produced a free cash flow of $129.9 million during the quarter, a 36% margin.
NASDAQ: DDOG
Key Data Points
With full-year revenue expected to rise 56%, Datadog still has high expectations for the remainder of the year. Datadog's product demand should remain strong for the year despite economic headwinds, as its product can help make businesses more efficient.
3. Snowflake
Like Datadog, Snowflake (SNOW 8.57%) focuses on cloud infrastructure. However, its niche is in data, and Snowflake's software allows its clients to store massive amounts of data and has the tools available to interpret and create models from the data.
To say this software is popular among its customers is an understatement. It has a 100% Dresner customer satisfaction score, and existing clients spent $1.74 this quarter for every $1.00 they spent last year. It also posted a 41% free cash flow margin, but it was unprofitable from a GAAP basis due to high stock-based compensation. Still, the business outlook is strong, with 72% product revenue growth projected for Q2.
Once valued at more than 150 times sales, its valuation has dropped significantly.
SNOW PS Ratio data by YCharts.
While 28 times sales is still expensive, Snowflake is growing consistently faster than many other companies in the market.
Investors will do well by purchasing Snowflake now with the mindset of holding at least three to five years.
4. The Trade Desk
Advertisements have been around for a long time, although they have taken different forms. Now digital ads are delivered through connected TV, podcasts, and website margins. However, for these ads to make the most impact, they need to be relevant to the viewer. The Trade Desk (TTD 2.57%) assists in this process by bidding on ads on behalf of advertisers to ensure they are getting the best value for their budget.
This business has been lucrative for The Trade Desk, as its revenue rose 43% year over year in Q1 and would have posted a profit if not for a large CEO performance bonus. The Trade Desk also has partnerships with big-time players like Adobe and Walmart that showcase The Trade Desk's best-in-class product.
NASDAQ: TTD
Key Data Points
While advertising budgets tend to get slashed during recessions, The Trade Desk's product provides ads to targeted consumers. So companies may cut overall advertising spending (like regular TV or billboards) while maintaining targeted ad spending due to increased success rates.
Regardless, The Trade Desk's product will be vital as the economy eventually recovers and moves into another growth phase.
5. Autodesk
Autodesk (ADSK 2.96%) provides engineers and architects with the software necessary to design buildings and products. It used to release new software editions annually, so if businesses had a difficult financial position, they would pass on the upgrade. Now Autodesk operates on a subscription model, which requires customers to pay their bills or lose access to the software necessary to operate in the industry.
This resiliency was displayed in its fiscal-year 2023 Q1 (ending April 30), as Autodesk reported 16% billings growth while its free cash flow rose 34% from the year-ago quarter. In addition, Autodesk's revenue streams are also spread across the globe, giving the business a strong balance in case a recession affects the U.S. but not the rest of the world.
| Region | Percent of Total Revenue |
|---|---|
| Americas | 41.4% |
| EMEA | 38.4% |
| APAC | 20.2% |
Source: Autodesk. EMEA-Europe, Middle East, and Africa. APAC-Asia-Pacific.
With Autodesk's products being vital to its industry, the company will continue to expand regardless of how bad the economy gets domestically or internationally.
With all these stocks, the mindset is to hold for at least three to five years. While the economy may be rocky, it will eventually return stronger than before. These five stocks can provide incredible returns if you can hold on through difficult periods.
