A bear market is cemented when an asset or index falls in value by 20% or more; by that definition, the Nasdaq-100 technology index is well and truly there with a loss of 27% from its all-time high. Some individual tech stocks are down significantly more than that, which can be intimidating for investors, but it's not all bad news.
A new bull market in the technology sector is a matter of when, not if. So, while you can't control when the bottom occurs, you can control the stocks you buy right now -- and given the steep discounts on offer, there are plenty of potential opportunities. Three Motley Fool contributors are eyeing Duolingo (NASDAQ: DUOL), Confluent (NASDAQ: CFLT), and DocuSign (NASDAQ: DOCU) thanks to their blockbuster earnings reports recently, which could pave the way for long-term growth.
A leader in digital education
Anthony Di Pizio (Duolingo): There are an estimated 1.8 billion people learning a foreign language globally, according to Duolingo. The company's flagship mobile app has amassed a whopping 500 million downloads since its inception, and while that's an eye-watering figure, its addressable opportunity clearly suggests there's plenty of potential growth ahead.
The company's success so far is attributable to its gamified approach to digital language education. Its app incorporates interactive features with a competitive component, combined with a social aspect that allows users to share their progress with their friends. Duolingo began to monetize with subscriptions in 2018, and it has rocketed up the leaderboards to become the highest-grossing mobile app in the education category across Apple's App Store and Alphabet's Google Play Store.
While many companies experienced slowing growth at the beginning of 2022 due to tightening economic conditions, Duolingo's first-quarter 2022 results blew away all expectations. The app runs on a "freemium" model monetized partly with advertising for free users, and paid monthly subscriptions for users who want a more comprehensive feature set. In the first quarter, the number of people who paid for a premium subscription soared 61% year over year to 2.9 million. They now represent a record-high 6.8% of Duolingo's 49.2 million monthly active users, up from 4.8% a year ago.
It resulted in a 55% jump in bookings -- which are expected to convert into revenue in the future -- to $102 million for the quarter. The result was so strong that management opted to increase its revenue guidance for the 2022 full year, now anticipating up to $358 million, which would represent 43% growth compared to 2021.
But there's a long-term play here, too. Duolingo is constantly improving the education experience, and it recently began to leverage artificial intelligence to help users learn more quickly from their mistakes. In 2021, it also developed brand new lessons for languages with non-Roman writing systems like Japanese and Hebrew to help expand its user base.
With Duolingo stock down 62% amid the broader tech sell-off, it might be a great time to start building a position in this fast-growing company.
Enabling real-time analysis
Jamie Louko (Confluent): The traditional standard for processing data is that a company sends it to a data warehouse, where it gets processed in batches daily. However, there are plenty of businesses that need to analyze their data immediately, like a bank that needs to ensure that transactions are not fraudulent. Real-time data analysis has been underserved in a market where data is growing rapidly, but Confluent is making real-time data analysis more commonplace so that businesses operate faster, more accurately, and more efficiently.
Confluent has seen stellar adoption. The company's customer count soared 62% year over year to 4,120 in Q1 2022, which helped it reach $126 million in quarterly revenue. Its remaining performance obligations -- which are contracted future revenue -- also shot 96% higher year over year to $551 million. This shows that the idea of real-time data analytics is becoming more popular, and Confluent is seeing the lion's share of this adoption.
Where the company shines is with Confluent Cloud. It is cloud-native and fully managed by Confluent, whereas its on-premise software is managed by the customer. Confluent Cloud revenue skyrocketed 180% year over year to $39 million, and the retention on its cloud product is much stronger than its core solution. Cloud's net retention rate was over 150% in Q1, much higher than the overall retention rate of 130%, and Cloud customers represented more than 50% of new bookings' annual contract value. Both of these platforms, however, are incredibly sticky, and the company is seeing customers use Confluent more at a much faster rate than customers are leaving.
Confluent's lowlights are its unprofitability and cash flow. In Q1, the company lost $113 million and it burned $58.4 million in free cash flow. The company has almost $2 billion in cash and securities on the balance sheet to fund these losses for a long time, but if a long-term recession were to hit the business and these losses accelerated for multiple years, Confluent could be caught between a rock and a hard place.
That being said, Confluent looks like a great company to own right now. The stock has been beaten down nearly 80% from its all-time high, and it now trades at 12 times sales -- a reasonable valuation for a company growing as rapidly as Confluent is. With digitalization trends in the business world at its back, Confluent is nicely positioned to succeed over the long term.
Streamlining agreement workflows
Trevor Jennewine (DocuSign): Agreements are the lifeblood of every business. But the manual, paper-based processes typically used to prepare, manage, and act on agreements are time consuming, costly, and prone to human error. Fortunately, DocuSign can help.
Its platform, aptly named the Agreement Cloud, comprises a suite of software built around DocuSign eSignature, a tool that enables organizations to capture legally valid electronic signatures on virtually any device, from anywhere in the world. The Agreement Cloud also includes solutions for automated contract generation, artificial intelligence-powered risk scoring, and electronic notarization. Collectively, those products accelerate agreement workflows, helping clients work more efficiently.
DocuSign faces competition from software giant Adobe, but the breadth of the Agreement Cloud gives the company a significant edge. In fact, DocuSign holds roughly 70% market share in electronic signature software, and the company has also positioned itself as a leader in agreement analytics and contract lifecycle management. That has translated into solid financial results.
In fiscal 2022 (ended Jan. 31), DocuSign grew its customer base 31% to 1.2 million, and the average customer spent 19% more, evidencing the effectiveness of management's land-and-expand growth strategy. In turn, revenue soared 45% to $2.1 billion and free cash flow skyrocketed 107% to $445 million.
Shareholders have good reason to believe that momentum will continue. DocuSign puts its market opportunity at $50 billion, half of which is attributed to its core electronic signature product. Given its strong position in that market, DocuSign should have no problem growing its business as more organizations invest in digital transformation. And with a price-to-sales ratio of 7.3, the stock is bouncing off its cheapest valuation in three years. That's why now is a good time to buy a few shares.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. Jamie Louko has positions in Apple and Confluent, Inc. Trevor Jennewine has positions in DocuSign. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Confluent, Inc., and DocuSign. The Motley Fool recommends the following options: long January 2024 $60 calls on DocuSign, long March 2023 $120 calls on Apple, and short March 2023 $130 calls on Apple. 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.