The technology sector took a bloody hit in early 2022, allowing Wall Street to recover from a short bear market caused by the coronavirus and forming a new bull market. Record high inflation has forced the Fed to turn ultra-hawkish with more tightening. liquidity controls and a higher interest rate regime. The bloodbath in the technology sector has continued to this day.
However, the valuation of this sector has been revised significantly. The Technology Select Sector SPDR ( XLK ), one of the 11 broad sectors of the S&P 500 Index, is down 25.5% year to date. The tech-heavy Nasdaq Composite Index is down 29.8% year to date and is now in a bear market.
We’ve picked five Internet-based stocks that are heavily shorted in 2022. However, these stocks have strong upside potential for 2023, supported by a favorable Zacks Rank. These companies – Airbnb Inc. (ABNB – Free Report), Datadog Inc. (DDOG – Free Report), Ceridian HCM Holding Inc. (CDAY – Free Report), Cloudflare Inc. (NET – Free Report) and Unity Software Inc. (U – Free Report),
Positive Development
While the Fed has yet to signal any change from its ultra-hawkish monetary policy, some Fed officials have recently taken a relatively dovish tone. Minutes of the Fed’s November FOMC meeting revealed that a “substantial majority” of Fed officials favored tapering future rate hikes.
In November’s post-FOMC statement, Fed Chairman Jerome Powell warned that the terminal interest rate could exceed 5% as previously estimated and that a soft economic downturn may not materialize. However, with several key Fed officials expressing dovish views recently, market participants expect the terminal interest rate to stay below 5%.
High-growth companies, especially technology companies, depend on easy access to cheap credit to expand their businesses. Therefore, the tapering of the Fed’s interest rate hike will be a positive development for the technology sector.
In addition, lower market risk-free returns mean a lower discount rate for future cash flows from equity investments. This will increase investors’ net present value of their investment in growth stocks.
Our top picks
We’ve narrowed our search down to five large-cap (market cap >$10 billion) Internet-based stocks that are down 35% year-to-date. The stock has strong upside potential for 2023, and a positive earnings estimate for next year has been revised over the past 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see Here’s a complete list of today’s Zacks #1 Rank (Strong Buy) stocks.
The chart below shows the price performance of our five picks to date.
Image source: Zacks Investment Research
Airbnb the travel industry continues to evolve. Due to the easing of travel restrictions, the ongoing recovery in both long-haul and cross-border travel is benefiting from ABNB’s Overnights and Experience bookings. Additionally, growth in average daily rates and total order value is a tailwind.
Growing active listings in Latin America, North America and EMEA contributed to the top line. Increased sales and marketing initiatives and continuous efforts to improve various aspects of the Airbnb service are helping the company gain momentum among hosts and guests.
Airbnb’s expected revenue and revenue growth for next year will be 13.3% and 15.6%, respectively. The Zacks Consensus Estimate for next year’s earnings has improved 6.8% over the past 30 days. ABNB’s share price is down 42.7% year to date.
Datadog benefits from new customer additions and cloud-based monitoring and analytics platform adoption driven by accelerated digital transformation and cloud migration across organizations.
Strong adoption of Synthetics and Network Performance Monitoring products is expected to help in customer acquisition for DDOG in the near term. Contributions from a robust cloud partner base including Google Cloud, Microsoft Azure and Amazon Web Services remain a key growth driver for DDOG, apart from an expanding portfolio.
Datadog has an expected revenue and earnings growth rate of 33% and 17.4% for the next year, respectively. The Zacks Consensus Estimate for next year’s earnings has improved 10.5% over the past 30 days. DDOG’s stock price is down 59.6% year to date.
Ceridian HCM It operates as a human capital management (HCM) software company in the US, Canada and internationally. CDAY offers Dayforce, a cloud HCM platform and Powerpay, a cloud HR and payroll solution that provides human resources, payroll, benefits, workforce management and talent management functionality for the small business market. Ceridian HCM also provides Back Office solutions for payroll and payroll related services. CDAY sells its solutions through its direct sales force and third-party channels.
Ceridian HCM has an expected revenue and earnings growth rate of 17.4% and 27.2% for the next year, respectively. The Zacks Consensus Estimate for next year’s earnings has improved 9.8% over the past 30 days. CDAY’s stock price is down 38.7% year to date.
Cloudflare provides an integrated cloud-based security solution to enable the convergence of a range of platforms including public cloud, private cloud, on-premise, software-as-a-service applications and IoT devices worldwide.
NET’s security products include cloud firewall, bot management, distributed denial of service, IoT, SSL/TLS, secure source connection and rate limiting products. Cloudflare offers performance solutions including content delivery and intelligent routing, as well as content, mobile and image optimization solutions. In addition, NET provides reliability solutions including load balancing, any broadcast network, virtual backbone, DNS, DNS resolver, online and virtual waiting room solutions.
Cloudflare has an expected revenue and revenue growth rate of 35.6% and 35.4% for the next year, respectively. The Zacks Consensus Estimate for next year’s earnings has improved more than 100% over the past 30 days. NET’s share price is down 66.1% year to date.
Commonwealth Program provides a platform for creating and managing interactive, real-time 3D content. U’s platform provides a suite of software solutions for creating, running and monetizing interactive, real-time 2D and 3D content for mobile phones, tablets, PCs, consoles, augmented and virtual reality devices.
Unity Software enables content creators and developers, artists, designers, engineers and architects to create interactive and real-time 2D and 3D content. U offers direct solutions through its online store, field sales operations, independent distributors and resellers in the United States, Denmark, Belgium, Canada, China, Colombia, Finland, France, Germany, Ireland, Israel, Japan, Lithuania, Portugal. Singapore, South Korea, Spain, Sweden, Switzerland and the United Kingdom.
Unity Software has an expected revenue and revenue growth rate of over 60.1% and 100% respectively for the next year. The Zacks Consensus Estimate for next year’s earnings has improved more than 100% over the past 30 days. U’s stock is down 74.8% year to date.