Tech stocks had a miserable spring. Since February, tech stocks have been in a steep correction. Making matters worse, the rest of the stock market was strong, thus making the tech sector’s performance particularly dispiriting.
In the bigger picture, tech’s setback makes some sense. Growth shares have been in a huge bull run for the past few years. And the Covid-19 pandemic particularly helped the internet and software stocks’ performance. With everyone stuck at home, a ton of services were forced to go digital in a hurry.
Now, though, a bit of a slump has set in. The economy is getting going again and traders are rushing back into economic reopening stocks. Old economy things such as airlines, movie theaters, and restaurants are soaring. Meanwhile, last year’s tech winners have leveled off. But, it seems, this rotation may be coming to an end. Summer has kicked off with tech shares starting to show a pulse again. As this shift continues, these seven tech stocks could be set for a rapid recovery:
- Spotify (NYSE:SPOT)
- Netflix (NASDAQ:NFLX)
- Tencent Music (NYSE:TME)
- Avalara (NYSE:AVLR)
- C3.ai (NYSE:AI)
- Unity Software (NYSE:U)
- nCino (NASDAQ:NCNO)
Tech Stocks Ready For A Comeback: Spotify (SPOT)
The global titan of music streaming has turned down the volume a bit in 2021. SPOT stock had cranked it up to $350 per share at the end of 2020 but has fallen back into the lower $200s now. That’s largely due to the broader wipeout in the tech sector.
As for Spotify specifically, its last earnings report was a mixed affair. The company continues to add a ton of subscribers and score solid market share. It is making particular inroads in overseas markets.
However, the market sold off SPOT stock on earnings due to weak profitability metrics. Spotify is still paying a high proportion of its revenues to the record labels for royalties. And its efforts to diversify the product line-up with things such as podcasts are taking some time to bear fruit.
Regardless, all the same concerns about profitability applied to Netflix for many years. Bears said the firm would never make money. Yet Netflix kept investing in its content and marketing spending regardless. Now Netflix has a huge lead in streaming that other media companies are desperately trying to catch up to. Fast forward a few years and Spotify will be in the same place in music. This dip offers an opportunity for long-term investors to own one of the world’s best streaming stories.
Speaking of Netflix, it’s a good buy during this correction as well. Shares have dropped 10% from recent highs on the slowdown in streaming stocks. It makes sense. The economy is reopening, so traders are thinking about in-person stocks such as movie theaters instead of buying Netflix. Certainly, growth will be slower this year than last for online services as people get vaccinated and are out and about again.
That said, Netflix is already in a winning position. The company is projected to be strongly free cash flow-positive going forward. This means that it has gotten over the growth stage and can now churn out more content without having to borrow money to do so. In fact, its cash flow generation is looking so good that some analysts see Netflix buying back a lot of stock in coming years.
Things have flipped on a dime now. Netflix’s rivals are racing to merge with each other. They need to consolidate to avoid getting left out in the streaming wilderness. Meanwhile, Netflix has the most well-known platform, the broadest international reach and a huge content library. A short-term slowdown in growth as the pandemic ends could offer a solid entry point for longer-term investors.
Tech Stocks Ready For A Comeback: Tencent Music (TME)
Streaming stocks are definitely a ripe opportunity at the moment. As AMC (NYSE:AMC) mania continues, the online music and video streamers have fallen a few spots down the watchlist.
That said, Tencent Music looks compelling right now. Shares got shredded over the past three months, falling 50%. A big part of that was due to Bill Hwang and his Archegos Capital fund. Hwang, you may recall, took huge positions in a number of media stocks and Chinese companies, using huge amounts of leverage to bolster his positions. When his shares started to lose value, the banks called in his margin loans and everything got liquidated at fire sales prices.
That includes Tencent Music, which was one of his largest holdings. Tencent, is something akin to Spotify or YouTube for the Chinese market. Tencent is a huge player there with its holdings in a huge number of verticals, including gaming and music. It has also made strategic moves, such as investing in record labels to help align its interests.
In any case, after getting pummeled when Hwang’s fund blew up, TME stock sells for just 35x forward earnings and 5x revenues. That’s a bargain in today’s technology environment.
Avalara is a leader in global sales tax accounting and compliance. It offers software-as-a-service (SaaS), primarily to retailers for their e-commerce channels.
This is an invaluable service. Right now, U.S. sales tax law is a hodgepodge of different regulations, varying by state, city, county, and product type, among other issues. That’s even before you get to corner cases such as selling liquor, for example, online. The pandemic created all sorts of new e-commerce opportunities. Avalara has all the nuances of tax law for the U.S., and increasingly the world, in its database, and vendors can plug into it to automatically calculate, track, and verify their sales tax accounting.
It’s not glamorous, but it is vital. And Avalara only faces a couple of meaningful rivals in its niche. Also, importantly, Avalara connects directly to rising e-commerce sites such as Shopify (NYSE:SHOP). AVLR stock has sold off this year as traders turn their attention back to brick and mortar retailers and other in-person stores and services. Digital commerce, however, remains a secular growth trend and Avalara will be a key part of it.
Tech Stocks Ready For A Comeback: C3.ai (AI)
Artificial intelligence (AI) is going to be one of the megatrends of the next decade and beyond. Question is, for investors, what’s the best way to play it? Palantir (NYSE:PLTR) is clearly the popular option now. However, its valuation is already huge; Palantir is at a more than $40 billion market capitalization today. C3.ai is at just a fifth of Palantir’s level.
However, C3.ai can face up to Palantir directly on the AI front. C3.ai sports contracts with numerous top-tier clients including the U.S. military. It also has a management team filled with some of Silicon Valley’s greats.
AI stock sold off this week on an earnings report that was ahead of expectations but not quite strong enough to boost the stock price. C3.ai tends to rely on large lumpy contracts and thus this creates some volatility around revenues. Regardless, AI stock was selling for as high as $183 recently; shares are a steal here around $60-$70.
Unity Software (U)
Unity is a leader in 3D-graphics. The company is famous for its Unity software engine, which was first used to produce graphics for video games. The Unity engine is cross-platform, working on everything from consoles, PCs and phones on to virtual and augmented reality. This puts Unity in a good position to create a metaverse. This is where players get to experience a shared social reality digitally that is available from any place and device.
Unity has also started broadening its product lineup. It is now offering Unity for other things such as 3D powered e-commerce. Think of stores where you can try on clothing or accessories and see them on you in virtual reality. The company is also offering the software for online real estate sales, film production and other such new channels.
Right now, shares are still trading at a reasonable valuation as investors worry about the overall size of Unity’s gaming market. After all, Unity already has more than 50% market share in mobile gaming, for example, somewhat limiting growth. Once the virtual reality applications go mainstream and some other projects such as 3D-assisted shopping take off, however, U stock should soar.
Tech Stocks Ready For A Comeback: nCino (NCNO)
nCino is a leader in the SaaS space for banking clients. Specifically, it was born out of a regional bank’s tech department. That bank had built a software platform to help speed up its loan processing, among other banking services. It realized that the United States’ thousands of other small banks were struggling with similar problems and launched its software platform as nCino. The company has prospered, and is now rolling out internationally and targeting other types of financial firms as well.
This is an opportune time for nCino because the banks are having record years. The SPDR S&P Regional Banking ETF (NYSEARCA:KRE) has doubled since last fall. The combination of a ton of government stimulus and a booming housing market has given the banks not one but two sources of strength. Consumers have cash to pay their bills while loan demand is off the charts.
This banking strength played out in nCino’s latest earnings results, which came out this week. The company’s revenues jumped 39% year-over-year, including a 47% surge in its all-important subscription revenues. And that was even before the banking boom really got going. nCino should put up some excellent results over the next few quarters as banks — flush with cash — invest heavily in their information technology systems.
NCNO stock has plunged from $100 to $60 due to the broader weakness in software stocks. However, shares should perk back up as folks realize that its banking vertical is booming in 2021.
On the date of publication, Ian Bezek held long positions in AVLR, AI, SPOT, NCNO, and U stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.