A the bear market is cemented when an asset or index falls by 20% or more; by this definition, the Nasdaq-100 The technology index is indeed there with a loss of 27% compared to its all-time high. Some individual tech stocks have fallen much more than that, which can be daunting for investors, but it’s not all bad news.
A new tech bull market is a matter of when, not if. So while you can’t control when the bottoming occurs, you can control what 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): According to Duolingo, an estimated 1.8 billion people are learning a foreign language worldwide. The company’s flagship mobile app has amassed 500 million downloads since its inception, and while that’s a staggering number, its addressable opportunity clearly suggests there’s plenty of growth potential ahead.
The company’s success so far is attributable to its playful approach to digital language education. Its application incorporates interactive features with a competitive component, combined with a social aspect that allows users to share their progress with their friends. Duolingo began monetizing with subscriptions in 2018, and it skyrocketed in the rankings to become the top-grossing mobile app in the education category across Applethe App Store and Alphabetfrom Google Play Store.
While many companies experienced slower growth in early 2022 due to tightening economic conditions, Duolingo’s Q1 2022 results swept away all expectations. The app operates on a partially monetized “freemium” model 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 6.8% of Duolingo’s 49.2 million monthly active users, up from 4.8% a year ago.
This led to a 55% increase in bookings – which should convert to revenue in the future – to $102 million for the quarter. The result was so strong that management opted to increase its full-year 2022 revenue forecast, now anticipating up to $358 million, which would represent 43% growth over 2021. .
But there is also a long-term game here. Duolingo is constantly improving the educational experience and recently started leveraging artificial intelligence to help users learn from their mistakes faster. 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 shares down 62% amid the tech selloff, now might be the time to start forging a position in this fast-growing company.
Enable real-time scanning
Jamie Louko (Confluent): The traditional standard for processing data is for a company to send it to a data warehouse, where it is processed daily in batches. However, many businesses need to analyze their data immediately, such as a bank needing to ensure that transactions are not fraudulent. Real-time data analytics has been underserved in a market where data is growing rapidly, but Confluent is making real-time data analytics more mainstream so businesses operate faster, more accurately, and more efficiently.
Confluent has seen stellar adoption. The company’s customer base soared 62% year-over-year to 4,120 in the first quarter of 2022, helping it hit $126 million in quarterly revenue. Its remaining performance obligations — which are contractual future earnings — also rose 96% year-over-year to $551 million. This shows that the idea of real-time data analytics is becoming more popular, and Confluent is having the lion’s share of this adoption.
Where the company shines is with Confluent Cloud. It is cloud-native and fully managed by Confluent, while its on-premises software is managed by the customer. Confluent Cloud’s revenue skyrocketed 180% year-over-year to $39 million, and retention on its cloud product is far stronger than its core solution. Cloud net retention rate was over 150% in the first quarter, well above the overall retention rate of 130%, and cloud customers accounted for more than 50% of the annual contract value of new bookings. Both of these platforms, however, are incredibly sticky, and the company is seeing customers using Confluent more at a much faster rate than customers are leaving.
Confluent’s weak points are its unprofitability and its cash flow. In the first quarter, the company lost $113 million and it burned $58.4 million in free cash flow. The company has nearly $2 billion in cash and securities on the balance sheet to fund these losses for an extended period, but if a long-term recession were to hit the company and these losses accelerated for several 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 fallen nearly 80% from its all-time high, and it now trades at 12 times sales, a reasonable valuation for a company growing as quickly as Confluent. With digitalization trends in the business world, Confluent is well positioned for long-term success.
Streamline Agreement Workflows
Trevor Jennewine (DocuSign): Agreements are the cornerstone of any business. But the manual, paper-based processes typically used to prepare, manage, and act on agreements are time-consuming, expensive, and prone to human error. Fortunately, DocuSign can help.
Its platform, aptly named the Accord Cloud, includes a suite of software built around DocuSign eSignature, a tool that enables organizations to capture legally valid electronic signatures on virtually any device, from any Where in the world. The Accord Cloud also includes solutions for automated contract generation, artificial intelligence-based risk scoring and electronic notarization. Together, these products accelerate agreement workflows, helping customers work more efficiently.
DocuSign faces competition from a software giant Adobe, but the breadth of the Cloud Accord gives the company a significant advantage. In fact, DocuSign has about 70% of the e-signature software market, and the company has also positioned itself as a leader in agreement analytics and contract lifecycle management. This translated into strong financial results.
In fiscal year 2022 (ended Jan. 31), DocuSign grew its customer base by 31% to 1.2 million, and the average customer spent 19% more, demonstrating the effectiveness of the strategy management’s growth in location and expansion. In turn, revenue soared 45% to $2.1 billion and free cash flow soared 107% to $445 million.
Shareholders have good reason to believe that this dynamic will continue. DocuSign estimates its market opportunity at $50 billion, half of which is attributed to its core electronic signature product. Given its strong position in this market, DocuSign should have no problem growing its business as more and more organizations invest in digital transformation. And with a price-to-sales ratio of 7.3, the stock is bouncing back to its cheapest valuation in three years. That’s why now is the time to buy some stocks.
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Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Anthony Di Pizio has no position in the stocks mentioned. Jamie Louko holds positions at Apple and Confluent, Inc. Trevor Jennewine holds positions at DocuSign. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Apple, Confluent, Inc. and DocuSign. The Motley Fool recommends the following options: $60 Long Calls in January 2024 on DocuSign, $120 Long Calls in March 2023 on Apple, and $130 Short Calls in March 2023 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.