Tech stocks have not fared well in 2022. Select SPDR Technology Sector ETF (XLK -4.00%) is down 22% year to date. Some of this drop is understandable considering how valuations were inflated in 2021. Still, some of these tech stocks have been oversold in 2022, and that makes them potentially great buys in September.
Let’s take a closer look at the top three tech stocks trading at a discount that could lead to big buys this month.
The shares of the tech giant Alphabet (GOOG -4.65%) (GOOGLE -4.68%) closely mirrors the year-to-date drop in the Nasdaq Composite index, with Alphabet down about 24% this year. The main cause for investor caution in this stock is the weakening advertising environment caused by the slowing economy.
When companies’ margins tighten due to weakening consumer demand, advertising budgets are often the first expense to be cut. This well-known recession-related trend ends up worrying Alphabet investors because the company derives more than 80% of its revenue from advertising-related sources. The question is whether that concern is exaggerated. Alphabet posted a respectable 13% year over year revenue growth rate in the second quarter. The growth demonstrates Alphabet’s prime position in advertising, as many other ad-focused companies didn’t fare as well in the second quarter.
What warrants concern is that Alphabet’s margins took a hit in the second quarter and its earnings per share (EPS) fell from $1.36 in the second quarter of last year to $1.21 this second quarter. This drop in profitability also worried investors and caused Alphabet’s shares to fall to the point where they are only trading at 20 times earnings. That’s a pretty good bargain for a class-leading company.
When the economy recovers, advertising spending should return to previous levels, which will help Alphabet’s profitability. Alphabet last completed this cycle in 2020 when COVID-19 caused many companies (especially those in the travel industry) to remove advertising.
Alphabet is poised for a recovery; investors should get in now to capture the full force of that move when it finally happens.
2. Crowd strikes
Cyber security has been a hot topic for some time, and it will continue to be on the radars of businesses and investors for the foreseeable future. My first choice in this space is CrowdStrike Holdings (CRWD -5.40%)which recently reported fantastic results.
CrowdStrike is a cloud-based cybersecurity platform that protects network endpoints (such as phones or laptops) from external threats. Through its Threat Graph, CrowdStrike receives billions of signals per week and uses that data to help you increase customer protection.
CrowdStrike’s popularity offers some proof of its potential. For example, 69 of the Fortune 100 use CrowdStrike, and their customer base grew 51% year-over-year to 19,686 during the second quarter of fiscal 2023 (ending July 31). Revenue grew similarly, rising 58% year over year to $535 million. CrowdStrike also generated a solid 25% free cash flow margin.
This success and colossal market opportunity come at a price for investors: a high stock valuation. CrowdStrike is trading at 21 times sales, which means investors are paying as much for CrowdStrike sales as they are for Alphabet profits.
For some, this is an expensive price to pay for a stock and a considerable investment risk. I believe CrowdStrike’s offering is best in class and its rapid rate of growth makes up for its high valuation. CrowdStrike is an excellent long-term investment, and buying now allows investors to get into this stock while it is more than 40% below its all-time high.
autodesk (ADSK -3.35%) it may be the most conservative choice among these three stocks. Its software gives engineers and architects the tools they need to do their jobs. Without Autodesk, your core customer base would have to re-draw plans or create parts by hand.
Due to their necessity, the software users are practically forced to pay the annual subscription fee to access their services. This model worked well for Autodesk in its fiscal second quarter of 2023 (ending July 31), as revenue and billing grew 17% year over year. Autodesk also gave optimistic guidance for the full year, with revenue expected to grow between 18% and 21%, which was a reiteration of guidance from the first quarter.
However, Autodesk raised its EPS outlook from $3.36 to $3.50, showing that management has extreme confidence in its ability to execute. The stock isn’t too expensive and is trading at 28x free cash flow, so investors shouldn’t worry as much about valuation as they might with CrowdStrike. Still, Autodesk isn’t an undervalued stock like Alphabet, so investors will need to hold onto it for the long haul if they want to see real gains.
Regardless, Autodesk is a strong business with a healthy recurring revenue stream; it’s an outstanding stock that will anchor a portfolio through good times and bad, as long as you pay a reasonable price for it.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Keithen Drury holds positions in Alphabet (C-shares), Autodesk, and CrowdStrike Holdings, Inc. The Motley Fool holds positions in and recommends Alphabet (A-shares), Alphabet (C-shares), Autodesk, and CrowdStrike Holdings, Inc. The Motley Fool has a disclosure policy .