Buy These 5 Strong Quant-Scored Technology Stocks After The Drop

Summary

• Software companies sold off in light of unfavorable valuations.
• Markets scoffed at strong quarterly earnings results in some cases.
• Watch these five technology stocks for a better entry price zone.
• Looking for a helping hand in the market? Members of DIY Value Investing get exclusive ideas and guidance to navigate any climate. Get started today »

The trouble with high-flying momentum stocks is that a reversion to the mean inevitably follows. In the last month, software companies in the technology sector reported strong results as markets expected to drop. The steep decline on the proverbial “sell on the news” may have more downside ahead.

Fortunately, investors who had the discipline to sell stocks that traded at excessive valuations booked profits.

There are five software stocks whose drop created deep losses for recent investors. They all trade at mediocre valuations, offset by strong growth prospects ahead. Even if the price-to-sales is still too high – that's randomly picking one of many valuation ratios – the long-term prospects are bright. Investors need to decide if the near-term risks of paper losses are worth the long-term gains ahead.

1/Alteryx

Alteryx (AYX) fell after posting Q4/2020 results beating expectations. The company earned 62 cents a share (non-GAAP). Revenue rose by 2.6% year-on-year to $160.5 million. As management did so in the last two quarters (at least), the full-year guidance sent shares in a downtrend.

AYX stock closed at $118.51 the day after earnings. It last traded at $93.20.

Data by YCharts

Management forecast revenue as low as $555.0 million, below the $567.18 million consensus estimate. Chief Revenue Officer Dean Darwin resigned on Feb. 22. The company’s vague excuse that the CRO’s social media posts did not align with the company's values is a weak one.

AYX has many positive catalysts ahead. CEO Mark Anderson pointed to customer demand for integration and the company’s flexibility in pricing as growing product demand. He also described 2021 as a transformational year. That suggests modest Y/Y growth. Investments to grow international businesses will weigh on profitability.

Source: SA Premium

AYX scores an A+ on gross profit margin while lagging on EBITDA margin. Readers may account for the weak margins in a five-year discounted cash flow EBITDA Exit model:

Model from finbox. Open to adjusting inputs.

Alteryx must increase revenue within a few years to justify the current share price.

2/ Palantir

Palantir’s (PLTR) may have peaked at $45. At below $25, the stock still commands a nearly $42 billion market capitalization. ARK Invest’s recent buying of 3.4 million PLTR shares will sustain the 45.5 times price-to-sales ratio for now. But insider selling may be too much for the fund to support.

Investors only have the above SA Premium ratings to reference. The tool cannot quantify profits and value at this time. This is due partly to the Q4 loss, despite a 40% increase in revenue to $322.1 million.

Data by YCharts

PLTR rewarded insiders with $241.8 million in stock-based compensation. For full-year 2020, that totaled $1.3 billion. Palantir’s total compensation exceeded revenue for the year.

Palantir has a long tail in business ahead. In the short term, it must hire more specialists to support customer implementation. That will hurt margins and add to losses.

3/ Fastly

Fastly (FSLY) posted an impressive 40% increase in revenue Y/Y to $82.65 million. It lost just 9 cents a share. For the first quarter, the company forecast revenue of $83 - $86 million, above consensus. Its net loss is at or above consensus (9 cents to 13 cent loss per share).

Data by YCharts

Investors who “sold the news” escaped further losses. On March 2, the company will sell $750 million in convertible senior notes due in 2026.

Fastly is a stock to watch. The company is expanding across multiple verticals. It has customers in gaming, education, financial services, and telecommunications/media. Reliance on one large customer is a potential headwind.

On the conference call, CEO Joshua Bixby said that the largest customer peaked at above 10% (of revenue) for a short period during the pandemic. It will offset such risks by increasing the customers that add to more than 10% of revenue.

Honorable Mentions

Number four on the list, C3.ai’s (AI) 18.7% drop on March 2 is notable. The software firm posted revenue of $49.1 million in the last quarter. At a $10.78 billion market capitalization, investors decided the 58 times price-to-sales is too high.

Data by YCharts

Look for new lows in AI stock in the weeks ahead.

Last on the list, Akamai’s (AKAM) 28.4 times price-to-earnings did not stop the stock from falling from a “double top.”

Source: finviz

As shown below, Akamai scores a B+ on value while Fastly gets an A on growth:

Data from SA Premium

Akamai is especially compelling because of its strong Q4 performance. CEO Dr. Leighton highlighted that the company surpassed $3 billion in revenue and delivered record traffic levels to its network. Operating margin topped 30% on a non-GAAP basis.

AKAM stock is most attractive on valuation, too. Its P/S is below 5 times. It has no debt and has a market cap of below $16 billion. Akamai also handled the pandemic disruption well. It extended payment terms for customers in the travel and hospitality sector. While security stocks like CrowdStrike (CRWD) trade at rich valuations, AKAM is on sale. The CEO said, "we didn't really have a Security business to speak of a few million dollars, now it's over $1 billion."

Your Takeaway

All five software companies have compelling long-term growth. As market selling pressure builds, add these firms to the watch list. They will interest investors who missed the last big run-up.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Donk1221]

Pltr. Inside trading will drag this stock down through 2021.

[Chris Lau]

@Donk1221 Agree: i've previously posted insider selling lockup expiry is a headwind. ARKK is buying up shares at 25+ so the drag is minimal.

[SA_NG]

Ayx will beat spy 2021

[Chris Lau]

@FBI Agent After the sell. Time the bottom on AYX and then buy it to outperform the SPY.

[kalu0003]

If you want to lose money, stay with the IT space. Intelligent investors are rotating out of the IT space. Fools are not. They will be weeping badly. This is just the beginning. My 2 cents.

[Chris Lau]

@kalu0003 They're rotating out of IT and into what?
I've seen GE, F, BA get strong uptake.

[Chris Lau]

PLTR today: implied "sell." Reality? Software stocks down on rates etching higher again.

Karp: "We’re in this for the long haul. If you are speculating or you’re thinking about this short-term, there are plenty of other things to invest in. If you want something else, it’s a huge world. Buy some other stock. You don’t have to buy Palantir. No one is forcing you.”
Karp did say he "likes so-called retail investors for lots of reasons" and said that Palantir's direct listing was a way to even the playing field between individual and institutional investors.
Wall Street's short-term focus is "one of the most destructive, corrosive attributes of an otherwise interesting and largely functioning system," said Karp.

[thinking.outloud]

@Chris Lau thanks for some good ideas to look into further!

[Australian investor]

Chris - all picks are good but I will enter when Nasdaq touches 10,000. I will buy when all will sell. Exactly what I did with oil, bank and airlines stocks one year back. No matter how fast a company can grow, it’s ultimately a function of price. All tech stocks are hyper valued in my views. Let’s buckle our seat belts and get ready for some blood on the street.

[Chris Lau]

@Nityananda Hello. DIY has a similar approach to buying at a discount. As ~$2T more lifts all boats, the tides rises.

I especially like your comment 'All tech stocks are hyper valued.' Seek Hyper-growth, not at hyper values.

[crayfishx4]

I likey AKAM, traded it a buncha times.. will prob buy again next week..
Yo Chris what say you about OLED??

[crayfishx4]

@Chris Lau OLED +25% since I recommended. And yes no subscription for my ranty recommendations! ;-)

[sgtextreme]

Why don’t you like snow, their customer base loves them

[Chris Lau]

@sgtextreme Snowflake does not have a strong enough moat relative to the value it trades it.

[cost.basis]

@Chris Lau you should cover MOGO.

[Chris Lau]

@cost.basis Short cover or cover as an article? I covered it as a 'buy' in 2H/2020 which since returned 6x.

[cost.basis]

@Chris Lau Great call. I hope you can cover it again. If you think its a short now-I might be on the wrong side of the trade.

[Chris Lau]

@cost.basis Sure, I will consider covering it exclusively to followers: seekingalpha.com/...

DIYvi Marketplace is long-only. We call 'sell' after the stock triples and in some case is a Friday Five-bagger, which Mogo was.

[glentor5]

Liked the mention of AYX. Last year was a beast at a buy at 100, sell at 130$, repeat 3 times. Now, seems like a buy at $80 or under tomorrow, and hold for 2 months

[Chris Lau]

@glentor5 It's approaching $80 or below. The Nasdaq's drop may dray AYX lower (predicted here, shown on landing page: seekingalpha.com/...

[Carol S1]

As a new tech investor I almost got out at the high only two weeks ago but was lulled into the Motley Fool type advice stay 5-6 years when my instincts were to sell. Now down 40% . Your advice and others seem to point to “sell at the high”. I already own PLTR and PYPL and TDOC unfortunately did not get out of NIO at high.

[wiredlitigator]

@Carol S1, I'd hold or sell calls if you are comfortable with the strike price. Those stocks aren't just hype and no doubt change the way we will do things. Diversify a bit, and expect lower returns than the 1 year skyrocket of the covid plays. Read a lot on investing (wall street journal, barrons, and everywhere else).

[Carol S1]

@wiredlitigator Thanks. I will take your advice. I am somewhat disenchanted by all the money movement following charts etc. I know they r important but as a country if we only move money around, we will not have the technical infrastructure to create the jobs we need to sustain the country. I bought PYPL because the CEO said it was their decade and they were going to own it. That is what I want to hear a CEO say. Our kids do not know what a bank is. They all use PYPL and SQ.

[Chris Lau]

@Carol S1 Please familiarize yourself with my writing style. The headline says Buy after the drop. DIY is a value shop so we have rules in place to minimize losses.

The fine print notes to refine WHEN and at WHAT PRICE to buy. We discuss that daily in our DIY chat room, so I don't casually endorse a blind buying of these very high-momentum stocks.

All five stocks in this article must have an SA Premium A+ or strong quant score somewhere for its inclusion.

Do you own PLTR, PYPL, TDOC at a profit or a loss? Then your future decision, should the Nasdaq selling (I predicted it in an exclusive for my DIY community) continue, is whether to average down or to sell.

PS: I'm not a fan of Motley fool. I remember their WPRT pump went on for years and I heard people lost money in it back then.

[Diesel]

On Friday AI opened down -10% and ended the day up 7.5%.

[clrodrick]

@Diesel - Friday was a day for the record books regarding that intra-day swing. Biggest total variance in moves up/down from opening to close since 2011 I believe! Crazy.

[5ofDiamonds]

"Buy These 5 Strong Quant-Scored Technology Stocks After The Drop" @Chris Lau Still you did not buy any of these? Interesting. My 2c.

[Chris Lau]

@5ofDiamonds
What I own are exclusive here: seekingalpha.com/...

You don't want to own the same stocks i write about. The GME pump gave us a one-time opportunity to unwind value trap positions at a gain.

The Marketplace I run started a new series on recovering from 30-50% losses.

[kalu0003]

Chris Lau
wrote
"@myrtovlachaki I do understand it. Your response detail is similar to that my marketplace members send me: I then score it at no extra charge on an outside quantitative tool www.stockrover.com/...
You don't need to double up so aggressively unless you anticipate a fast bounce. Why not split the trade to 1/4 buys instead of double down (1/2)?
Other than NTVA, which is on sale, and TDOC, 38% off highs, you're heavily on tech. This leaves you no room for income (dividend), cyclical (oil/gas), or defensive."
Chris - you are deceptive here. Please tells us all here when the market will have a fast or slow bounce. I f you can tell this to the world - you should not be here on this forum. You should be filthy rich.
Your list is only from one sector - IT (AYX, PLTR, FSLY, AI, AKAM). Your list is not diversified. Your list is suggesting to folks to focus only on the IT space. If you are to argue intelligently from your comments above - you should have given your readers your top 3 from each sector. You have not! As I think of your article now - I am a bit disappointed (why do these folk pay for your subscriptions).
Folks there are a lot of fake analysts - be aware. Just saying. Thanks.

[lew69sd]

My 5 are better:

1. TDOC
2. PLTR
3. FVRR
4. AI
5. PYPL

[Chris Lau]

@lew69sd Nice selection. I picked TDOC on 05/2019 for a 209% return:
seekingalpha.com/...

FVRR is new to me. I will share it with the marketplace gang.

PYPL is a past pick, a multi-pair trade along with credit card stocks.

[ndardick]

@Chris Lau Has TDOC backed off enough to buy it here?
Do you like SQ or PYPL more? I cannot figure out why Cathie Wood of ARK Invest is currently selling PYPL to buy SQ.

[Chris Lau]

@ndardick Few are digging into the details of ARK trades post 150% (whatever) 2020 returns. The latest trades appear amateurish. ARK has a good problem: cash inflow to lift poor-performing picks.

A rising tide lifts all boats. That tide is receding. A bigger tide will return so fear not.

[baary]

Fine article Chris!!!
All stocks mentioned except for AKAM are on my watch list. Fastly already own but have to admit I am a bit frozen to add or buy. I guess I am in a wait and see mode for a while. Not a political statement intended but I just don't trust the current administration. I like it when a President states you can judge me by the Dow Jones Average and we have the exact opposite currently looking for ways to steal our money.

GL

[kevinconnolly]

Great article Senior and I love AKAM-------for some unexplained reason never pulled the trigger!!

[4121]

@kevinconnolly

I think people have a dislike for old tech compared to new tech, except for FAANG (;probably messed up the letters). That explains the disregard for AKAM.

[hermi1]

Thanks for the nice write up Chris. I also appreciate your comments to other people’s articles. I like AYX and FSLY for the long term and have been averaging down.

[Trader of Orange]

The title ('Buy these stocks') doens't align with the key message, which is: wait and see, add these stocks to your watchlist.

[DealMatters]

Only a sideline comment: 
Great table-tennis! I'm ecstatic journalism isn't scored, albeit for rebuttal or even attempt, in native language usage.✌️