Insights

3 Humbled Nasdaq Stocks Ready to Bounce Back

Some tech stocks are getting too cheap to ignore, but not all of them are good buys right now. Growth stocks took a beating over the past year or so, as rising interest rates and recession fears eliminated investor risk tolerance. These three stocks took a beating in recent months, but they still have great long-term prospects.

1. Nvidia

Nvidia (NASDAQ: NVDA) was one of the darlings of the pandemic bull market. The semiconductor stock rode a wave of strong results and investor momentum to become one of the largest companies in the world. Its price-to-sales ratio peaked close to 35, and its forward  price-to-earnings (P/E) ratio swelled to 75. Those sorts of valuations weren’t sustainable when investors moved away from growth stocks about nine months ago.

Nvidia is much more reasonably priced now. Its forward P/E ratio is around 34, and its price-to-sales is down to 15. Last quarter, the company reported record sales after growing 45%. Nvidia semiconductors are state-of-the-art market leaders in several major growth categories, including data centers, gaming, automation, and robotics. Nvidia has set itself up to be one of the greatest beneficiaries of the emerging tech trends that should define the near future. It’s also shrewdly investing in next-generation quantum computing so that it can stay afloat when its current product portfolio becomes obsolete.

Image source: Getty Images.

Ongoing rate hikes and a potential recession could hurt Nvidia’s growth rate, which probably result in the stock dropping further. That shouldn’t dissuade investors who love the company. Its valuation is reasonable enough for long-term investors to enjoy gains as the company’s cash flows expand.

2. Datadog

Datadog (NASDAQ: DDOG) provides application monitoring and security for cloud software. Its product helps customers to maximize the performance of their digital operations. and capability of their cloud while protecting against threats. That’s relevant for almost every company in the modern economy, and it’s a major point of emphasis as software influences every aspect of operations. Those are fantastic growth catalysts.

Gartner gives high marks to Datadog, naming it a leader in the application performance monitoring industry. Datadog’s customers seem to agree — its net retention rate is over 130%, indicating that customers are sticking around and expanding their relationship. That’s strong evidence of quality and satisfaction.

DDOG PS Ratio data by YCharts

Datadog rode these catalysts to 83% revenue growth last quarter. The company reported net profits and $130 million in free cash flow. That’s exciting for investors who are looking for a rare combination of huge growth along with profitability. Datadog stock isn’t cheap at price-to-sales ratio above 25 and forward P/E above 140, but it’s much cheaper on the basis of fundamentals than it was in December.

3. ZScaler

Zscaler (NASDAQ: ZS) is a cybersecurity stock that specializes in edge protection. Cyberattacks are commonplace in the headlines these days, and criminals often access sensitive corporate data through employees and customers. That’s exactly what Zscaler aims to stop, and it’s considered an industry leader by Gartner.

Zscaler is growing faster than 60%, which is an incredible feat for a company that’s on pace to surpass $1 billion in annual revenue. It’s not profitable yet, but it produces positive free cash flow, so it’s not burning through cash to achieve such impressive growth. In this regard, Zscaler is a lot like Datadog — it even has very similar valuation ratios. It’s hard to call this stock cheap, but Zscaler’s value has plenty of room to grow if it stays on this trajectory.

Ryan Downie has positions in Nvidia. The Motley Fool has positions in and recommends Datadog, Nvidia, and Zscaler. The Motley Fool recommends Gartner and Nasdaq. The Motley Fool has a disclosure policy.

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