The 2022 market was always going to be a tug of war between earnings and interest rates. Corporate profit growth fueled by the reopening has come up against contracting valuations and expectations of tighter monetary policy.
While the battle has led to a chaotic period for stocks, the past few weeks have played out logically and according to the script. Financial markets are entering their next chapter, and investors are finally rushing to adapt.
A rise in Treasury yields driven by expectations for a more aggressive Federal Reserve has contributed to a sharp stock-market selloff to begin 2022, particularly for the rate-sensitive growth stocks that feature heavily in the Nasdaq Composite COMP, +3.13%.
The index has slid more than 10% from its November record finish, meeting the definition of a correction. The Dow Jones Industrial Average DJIA, +1.65% finished 6.8% off its Jan. 4 record close on Tuesday, while the S&P 500 ended 9.2% below its Jan. 3 record.
The buy now, pay later industry took off in 2021. Consumers have embraced the option to go shopping and pay off their purchases in a fixed number of (sometimes) zero-interest payments. Affirm Holdings (NASDAQ: AFRM) is among the leading companies in the buy now, pay later (BNPL) space. It went public in Jan. 2021 at $49 per share.
Affirm’s downfall seems driven by a few factors. First, high inflation and the potential for rising interest rates have spooked the market overall. It resulted in significant downward pressure for most growth and technology stocks. In the Nasdaq, for example, less than one-fifth of the more than 2,500 stocks in the index are above their 200-day moving average, a sign that market sentiment is overwhelmingly negative.
Meanwhile, Affirm could be at the beginning of a period of accelerated growth. It’s formed several strategic partnerships with crucial e-commerce partners, including Shopify, Amazon, Target, and Walmart.
Most of these partnerships are in their early stages, and results haven’t begun to flow through to Affirm’s financials yet. Amazon implemented Affirm’s BNPL offering for the holiday season. So investors should look for a jump in growth as early as the next quarterly report. Meanwhile, Shopify expanded its Affirm-powered “Shop Pay,” which helped Affirm’s merchant count surge 1,468% year over year to 102,200 in the fiscal 2022 first quarter.
Affirm has deals in place with the biggest e-commerce and retail brands in the world. While also benefiting from the tailwind of a BNPL industry that could grow gross merchandise volume 15-fold by 2025.
I think it’s obvious what my verdict is, but I’ll say it anyway: Affirm stock is an obvious buy at these levels if you believe in the BNPL business model. Affirm’s recent initiatives are game-changing with the potential to create network effects for the business. This will make them a dominant player in the consumer finance space for years to come.
Confluent (NASDAQ: CFLT) falls into the group trading above IPO. Shares of the tech company are up about 73% since coming public in June 2021. And that rise is despite the stock is down about 34% from 52-week highs set in early November.
Confluent’s service is incredibly valuable to its customers. Considering that Kafka is mission-critical for many enterprises, yet it is only being used in a small segment of the business, Confluent has a very successful land and expand strategy. Once it becomes the manager for a subsect of an enterprise and the business sees the benefits. The customers want to expand Confluent into other parts of the business.
This strategy has resulted in very impressive growth for Confluent. In the third quarter of 2021, revenue grew 67% year over year, and customers spending over $100,000 increased 48%. Its net retention rate is also strong at 130%, meaning existing customers spent 30% more in Q3 2021 than they did in Q3 2020.
Despite Confluent’s strong success, the company has barely scratched the surface of its opportunity. Of the Fortune 100, 80% use Kafka. However, Confluent’s service has yet to be as widely adopted as Kafka has been. However, management thinks this will change and that Confluent’s addressable market will nearly double from 2021 to 2024 to $91 billion as managed Kafka services increase in demand.
At 40 times sales, this company is not cheap, and investors should be prepared for shares potentially to dip lower in the short term. However, this company has a superior product and unrivaled competitive advantages, which have resulted in strong growth and financial success. Signs point to continued growth for the company, and this might be worth paying up for today if you’re investing in the company for the next five years.
dLocal has many integrations, but none bigger than with Shopify. With dLocal, Shopify merchants can begin selling to fast-growing emerging markets, even if the business is a small retailer based in the midwest.
dLocal is giving companies unprecedented e-commerce access to areas previously unreachable. Massive brands like Nike and Amazon are already using dLocal, showcasing its usability from small businesses on Shopify to the largest e-commerce company in the world.
A strong dLocal competitor is PayPal. It serves emerging market consumers similar to dLocal’s pay-in solution. However, many websites (including Amazon) still don’t accept PayPal as a payment method, reducing its usability.
Investing in dLocal comes with some risks. One is that it has substantial customer concentration, with the top 10 customers accounting for 62% of revenue from June 30, 2021, to the beginning of the new year. This was down from 70% during the previous year’s time frame, showing some improvement. In the same period, one customer accounted for more than 10% of revenue. If any of these heavy-hitting customers left, dLocal would take a serious sales hit. Investors should make sure that as dLocal expands and captures more business, this concentration is reduced.
A dLocal investment could be risky right now; however, I believe the upside outweighs that risk. Keep your position sizing small and add additional shares if it succeeds. Applying this principle will allow the position to fade into obscurity if it fails and return huge profits if it is successful.
DDOG in New York City is a monitoring and security platform for cloud applications. It provides a monitoring and analytics platform for developers, information technology operations teams, and business users in the cloud in North America and internationally.
On Jan.5, 2022, DDOG announced a global strategic partnership with Amazon Web Services, Inc. (AWS). Ilan Rabinovitch, Senior Vice President, Product & Community at DDOG, said, “This extended partnership with AWS will help speed the pace of innovation for customers using AWS and Datadog, and we are excited to provide deeper product alignment and go-to-market initiatives to ultimately benefit our customers.”
DDOG’s revenue increased 74.9% year-over-year to $270.49 million for the third quarter, ended Sept. 30, 2021. Its gross profit came in at $207.16 million, up 71.6% year-over-year, while its net loss was $5.48 million, compared to $15.15 million in the previous period. Also, its loss per share came in at $0.02, versus $0.05 in the year-ago period.
Analysts expect DDOG’s revenue and EPS to grow 41.6% and 45%, respectively, year-over-year to $1.41 billion and $0.58for fiscal 2022. It surpassed the Street’s EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 21.5% in price to close Friday’s trading session at $125.55. Wall Street analysts expect the stock to hit $204.71 in the near term, which indicates a potential 63.1% upside.
The lofty gains that Global-E (NASDAQ: GLBE) had racked up last year are coming undone in grandiose fashion. Shares were down 10.4% today as of the market close. In total, the stock is now 47% off its all-time high notched last September. With most of those losses coming in recent weeks on fears of rising interest rates.
The Federal Reserve has set the table for a few interest rate hikes in the coming year to try to tame inflation, and high-growth but richly valued stocks are taking it on the chin. Nevertheless, while higher rates are proving to be the catalyst for what was bound to be an eventual sell-off in Global-E, that doesn’t change the company’s rosy prospects.
E-commerce still has a long runway of growth ahead of it, and companies like Global-E that provide the tools to make it all possible could be some of the most profitable ways to invest in digital commerce’s development. Expect the company to provide a financial update on Q4 2021 sometime in February.
While there are a lot of highlights with Global-E, there are always lowlights. The first is the company’s unprofitability. In Q3, the company’s net loss represented 48% of revenues for the period, and the company is right on the border of being free cash flow-positive. In the first nine months of 2021, the company’s free cash flow was negative $9 million, but it generated a positive $5 million in Q3.
As an investor might expect with a company that has extremely low churn and is growing fast. As the company’s valuation is high. Even after the 33% drop from its highs, Global-E still trades at 32 times sales — a nosebleed valuation for any investor. Additionally, the partnership with Shopify is a great bonus today.
It could also hurt them in the long term. Shopify is an innovative business that could potentially develop a competitive platform internally. Then, not only would it be a strong competitor, but it could immediately cut the relationship and gain lots of customers.
Lightspeed Commerce (TSX: LSPD)(NYSE: LSPD) has lost 75% of its valuation in four months. It first started with a negative report from short-seller Spruce Point Capital. It then went on to overall market weakness because of the spread of the COVID-19 Omicron variant. And now it is the tech stock sell-off. This chain of events got the worst of investors. Some investors booked profits and some losses.
Lightspeed stock is currently trading at $38.25, a level that was last seen in July 2020 and before that in July 2019. This is a price the bearish short-seller Spruce Point Capital has valued Lightspeed stock at ($22.50–$45.00 per share).
Lightspeed is a value play as it has dipped to unexpected levels. The company is scheduled to release its third-quarter earnings on February 3. The quarter was pretty rough for the entire e-commerce industry as supply chain issues and high inflation impacted holiday season sales. Moreover, the stock market is going through a sell-off, so probably there could be more dip in the near future.
If you bought Lightspeed stock at its peak (above $100), you could be in for a long-term downside. You could recoup losses by buying this stock below $35 and booking profit at regular intervals. If you are not a shareholder, you could add this stock to the watchlist, and buy it when it rallies for three to four days in a row. It could prove to be one of your best purchases of 2022.
Investors have been excited about Okta (NASDAQ: OKTA) stock as a way to gain exposure to the digital transformation industry. The cloud services specialist has a head start in attractive niches like identity management, and it also enjoys a rapidly expanding addressable market in cybersecurity.
But its shares completely missed the 2021 rally, falling by more than 10% compared with the S&P 500‘s 26.9% spike. The good news is that this slump left Okta cheaper compared with some of its peers, even if it still sports an expensive valuation.
Okta is situated right in the middle of some huge growth trends. As a leading digital identity management specialist, it’s benefiting from the broad push to move more work processes online and allow for more hybrid work arrangements. In short, it’s a great way to invest in digital transformation trends that are likely to power growth for many years to come.
The level of those investor returns will depend in part on whether Okta is too expensive right now. And, with shares trading at more than 25 times annual sales, that’s a real possibility.
Okta has a clearer path toward growth, though, assuming it is able to expand its sales at its planned 30%-plus annualized clip toward $4 billion in fiscal 2026. Microsoft, by contrast, is expected to grow at about 14% in 2022, and investors are expecting roughly the same from Zoom.
Thus, if you’re looking for faster growth — and don’t mind waiting a year or so for Okta to begin showing off its long-term earnings potential. The stock might be a great addition to your portfolio this year.
Mobile entertainment and e-commerce contender Sea Limited (NYSE: SE) has quickly emerged from a regional Southeast Asian player to a major global entity. Business is looking as strong as ever, yet Sea’s shares are down about 50% over the past two months.
Southeast Asia, Sea’s core market, is one of the world’s fastest-growing regions. With a population rising over 50% faster than the United States’s, and GDP increasing more than twice as fast.
Sea built its business on Garena, the video gaming and digital entertainment division whose copious cash collection fuels the company’s innovation and growth. Free Fire, Garena’s self-developed game, has been the highest-grossing mobile app for nine consecutive quarters in Southeast Asia and Latin America, and four consecutive quarters in India.
With a thoughtful playbook for international expansion, and three businesses cleverly designed to promote and reinforce each other, Sea Limited is growing its footprint beyond Southeast Asia. Gamers now enjoy Free Fire in over 130 countries.
While Shopee has launched in four countries in Latin America, three countries in Europe, India, and China, all in the past two and a half years. Sea’s ability to replicate its success in such socioeconomically and culturally diverse regions bodes well for its future.
With the recent pullback, shares are trading at a much more reasonable price-to-sales valuation as of early January 2022. Now maybe an excellent opportunity for long-term investors interested in fast-growing tech stocks to take a small position in this promising business.
Investors might’ve felt FOMO since cybersecurity stock SentinelOne (NYSE:S) went public in June 2021. The market-wide sell-off has steadily pushed shares lower, down 17% since the beginning of January.
SentinelOne uses a software-as-a-service business model, so looking at the company’s annual recurring revenue (ARR) is an excellent way to gauge how the business is performing. Its ARR grew 131% year over year to $237 million in the third quarter of fiscal 2022 (the calendar 2021 year).
The company’s revenue growth is coming from multiple directions; it’s gaining new customers, picking up 600 new accounts in Q3 from its previous quarter, and growing total customers 75% year over year to more than 6,000.
The company’s non-GAAP (adjusted) gross margin was 67% in Q3, 9 percentage points higher year over year, which could continue going up over time. Meanwhile, the company has $1.6 billion in cash on its balance sheet while burning just $21 million in Q3 (negative free cash flow illustrated in the chart above).
SentinelOne seems in little danger of running out of money. It could increase its marketing spend, leading to continued strong revenue growth.
High inflation has the market spooked about the potential for rising interest rates, which can negatively impact the valuation of stocks. Investors should be rooting for SentinelOne to keep falling; a lower valuation would set the stock up to produce significant returns moving forward.
But remember, nobody knows when the bottom in a market correction will come. So consider dollar-cost averaging into SentinelOne or any stock you like so you don’t miss your chance.