The broader market may be down, but some sectors are doing worse than others. Tech stocks seem to be feeling the most pain at the moment with some stocks trading down more than 50% over a relatively short time frame. Something to remember though about the current situation is that many great companies are being sold off heavily only because of their association with the tech sector. That means long-term investors can find some tremendous bargains by sifting through the carnage to invest in unfairly some beaten-down tech stocks.
Three stocks that are great buys right now are Shopify (NYSE: SHOP), Twilio (NYSE: TWLO), and PayPal Holdings (NASDAQ: PYPL). This trio was hyped up during the pandemic but came crashing down when their business began to normalize. The market has severely overcorrected and this could be an excellent time for long-term investors to get in.
Shopify's tools allow businesses of all sizes to launch an e-commerce website. With Shopify, businesses can process credit card payments, sell internationally, and access Shopify's fulfillment network, allowing its customers to compete with e-commerce giants in product delivery speed.
Shopify's stock price has fallen 80% to around $330 a share. It last traded this low before the pandemic, despite its monumental business gains in the past two-plus years. That suggests the stock is an excellent value now.
Shopify grew revenue by 22% year over year in its latest quarter and gross merchandise volume (GMV) by 16%. While this was a slowdown from 2021's growth numbers, management quickly pointed out its two-year compounded annual growth rate of 60% (revenue) and 57% (GMV). None of the business gains from the pandemic -- most of which are permanent -- are being priced into the stock.
Valued at merely nine times sales, Shopify hasn't seen a valuation this low since 2016. With management projecting faster growth later in the year (as if 22% wasn't rapid enough), Shopify is still on track. The stock will eventually follow suit.
More than 268,000 entities utilize Twilio's APIs (application program interfaces) to communicate with customers, clients, and/or patients. Twilio's software does the complicated programming for its customers, so non-software engineers can use it to set up basic communication tasks like confirming appointments through text or sending marketing emails.
Similar to Shopify, Twilio's tools are sticky, and customers stay with Twilio simply because it is difficult to leave once set up. This retention has led to a dollar-based net expansion rate of more than 125% for every quarter since Q1 2020. As every customer who stayed with Twilio is now spending at least $1.25 for every $1.00 last year, the company is consistently growing its revenue.
This growth rate isn't just a one-quarter anomaly; CEO and co-founder Jeff Lawson reiterated his confidence that Twilio will deliver 30% or more organic growth every year through 2024. It backed that promise up in Q1 with organic year-over-year growth of 35%, although Q2's growth is projected to be about 28%. This promise is an annual projection, so Twilio will still be able to reach it.
In another Shopify parallel, Twilio stock is down nearly 80% and is at a price point -- you guessed it -- last reached before the pandemic erupted. The market has not factored in Twilio's future growth or its colossal pandemic gains; wise investors will take advantage of this opportunity.
3. PayPal Holdings
Perhaps the most well-known of these three stocks, PayPal provides peer-to-peer, online, and in-person payment options. From Q1 2020 to Q1 2022, PayPal added more than 100 million active accounts to reach its current 429 million.
PayPal's stock has the worst sentiment of the three, as its price has crashed below $80, a threshold last reached in 2018. It's hard to imagine PayPal is in a worse spot now than it was four years ago, but that is the current thinking of the market.
When valued from a price-to-earnings (P/E) perspective (both trailing and forward earnings), PayPal has never been this cheap as a public company by a wide margin.
This valuation is despite management expecting revenue to grow at a 12% rate for the whole year. For Q1, PayPal beat revenue expectations by one percentage point by growing at a 7% rate and beat non-GAAP earnings per share (EPS) estimates by $0.01. But, unfortunately, it also had to cut revenue guidance to the previously mentioned 12% from 15%.
PayPal has more work than Shopify or Twilio to get back on track, but it has a strong comeback potential. With CEO Dan Schulman projecting EPS to grow in the mid-teens next year, investors who hold on will be rewarded in the future.
Three options to consider
These three stocks are severely undervalued and have been torched by the market. I have no idea when the tech sell-off will end or when the market will rebound. However, with the business trajectories of Shopify, Twilio, and PayPal, I'm confident each will have a considerably higher stock price three to five years into the future.
Almost no one can perfectly time the bottom; investors looking to establish a position in any of these stocks should slowly ease in. Doing this will avoid being tied to one entry price and could get even better prices if the sell-off continues.
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Keithen Drury has positions in PayPal Holdings, Shopify, and Twilio. The Motley Fool has positions in and recommends PayPal Holdings, Shopify, and Twilio. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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