After delivering a third consecutive year of double-digit returns in 2021, the S&P 500 index pulled back from all-time highs in January. The widely-followed Wall Street barometer is down more than 7.9% year-to-date (YTD). The market correction has been particularly noteworthy for the Nasdaq 100, while the tech-heavy index declined more than 13.1% so far in 2022.
Yet, these declines do not necessarily surprise many on Wall Street. For several months, analysts have been debating whether a bear market will be here soon. Headwinds include frothy valuations in many stocks, red-hot inflation and imminent interest rate hikes by the Federal Reserve. The market is also being impacted by supply chain disruptions, the ongoing Covid-19 pandemic and most recently, geopolitical tensions in Ukraine.
Despite the jittery market sentiment and recent market declines, many analysts still remain optimistic about the broad economic outlook. In light of a new market that no longer favors expensive growth stories, this article discusses seven analyst upgrades that smart investors cannot afford to ignore.
These analyst upgrades offer compelling opportunities to buy well-known growth names at a significant discount:
- Ambarella (NASDAQ:AMBA)
- Bloom Energy (NYSE:BE)
- Cyberark Software (NASDAQ:CYBR)
- Datadog (NASDAQ:DDOG)
- Hubspot (NYSE:HUBS)
- Williams-Sonoma (NYSE:WSM)
- Zurn Water Solutions (NYSE:ZWS)
Analyst Upgrades: Ambarella (AMBA)
52-week range: $82.59 – $227.59
Ambarella offers semiconductor processing solutions for high-definition (HD) video capture, sharing and display. Management is increasingly focused on computer vision (CV), an artificial intelligence (AI)-based technology.
Computer vision “allows computers to recognize objects, scenes, faces and much more from digital images taken by cameras (Video or Picture).” Recent metrics suggest that in 2020, the global CV market was worth more than $11 billion. Between 2021 and 2028, revenues in the segment are forecast to increase “at a compound annual growth rate (CAGR) of 7.3%.”
As a result, Ambarella investors are excited about the possibility of more sophisticated applications and larger addressable markets worldwide. Autonomous driving and advanced driver-assistance systems (ADAS), as well as in-home security markets, will likely provide the catalysts for further growth.
The group released third-quarter 2022 results in late November. Revenue soared 64% year-over-year (YOY) to $92.2 million. The chipmaker generated net income of $22.2 million, or 57 cents per diluted share, up from $3.3 million in the prior-year quarter.
Total cash and equivalents ended the quarter at $457.8 million. The Q4 guidance projects revenue to increase 45% YOY to roughly $90 million.
Wall Street noted that Ambarella’s Q3 revenue benefited from CV solutions. In January, the chipmaker announced a strategic partnership with Seeing Machines, which focuses on AI-powered operator monitoring systems to improve transport safety. The two companies will work on ADAS and in-cabin occupant solutions.
AMBA stock trades at $135 per share, down 34% YTD. Yet despite the recent decline, shares are still on the expensive side, trading at 77 times forward earnings and 16 times trailing sales.
Bloom Energy (BE)
52-week range: $12.55 – $37.01
Bloom Energy offers electric power solutions via solid-oxide fuel-cell servers, which “convert fuel to electricity, without combustion, to deliver reliable, resilient, clean and affordable energy.” Instead of burning fuel, the system produces electricity through an electrochemical reaction.
Management issued Q4 2021 metrics on Feb. 10. Revenue increased 37% YOY to $342.5 million. Net loss widened to $33.3 million, or 19 cents per diluted share, compared to a net loss of $27.1 million, or 16 cents per diluted share, a year ago. Cash and equivalents ended the period at $615 million.
During the quarter, Bloom delivered 735 systems — a record number, up 63% YOY. Analysts noted the robust growth in demand that could fuel long-term share price growth.
The company plans to outsource its low-margin fuel cell installation to third parties and keep other high-margin revenues in-house. Management aims to increase the adjusted gross profit margin to 24% in 2022, up from 21% in Q4.
During the earnings result, Bloom also raised its revenue guidance. It now expects revenue to hit least $1.1 billion for full-year 2022.
BE stock currently changes hands for about $17. Despite gaining nearly 24% over the past two weeks, it is down more than 50% from its high in November. Shares are trading at 3.6 times trailing sales.
The 12-month median price forecast for Bloom Energy stock is $26.50. Interested readers could regard the recent decline in BE stock as an opportunity to buy into the growth of fuel-cell systems.
Analyst Upgrades: Cyberark Software (CYBR)
52-week range: $113.34 – $201.68
Cybersecurity group Cyberark Software is well-known for its privileged access management services for enterprises. In other words, the focus is on identity and password management. Around 7,000 firms rely on Cyberark, including more than half of the Fortune 500 names.
Management released Q4 2021 financials on Feb. 10. Revenue was up 5% YOY to $151.3 million. Net income fell to $11.8 million, or 28 cents per diluted share, down from $32.6 million in the prior-year quarter. Cash and equivalents ended the period at $1.2 billion.
Investors noted the growth in the subscription portion of the company’s Annual Recurring Revenue (ARR). Wall Street loves a subscription-based business model, as it means revenue is stable over time. For the cybersecurity specialist, subscription revenue has become a primary growth driver, doubling to almost $48 million for the quarter.
On these metrics, CEO Udi Mokady commented, “In the fourth quarter, we experienced a step function change in demand resulting in the largest sequential increase in ARR. In addition, subscription ARR growth accelerated to 146 percent, and total ARR growth accelerated to 44 percent.”
The company anticipates revenue of $582 million to $598 million in 2022. A year ago in 2021, it was $503 million. Wall Street analysts are giving thee seal approval.
CYBR stock trades around $140, down 19% YTD. Shares are trading at 12.08 times trailing sales. The 12-month median price forecast for Cyberark stock stands at $200.
52-week range: $69.73 – $199.68
Software-as-a-service (SaaS) group Datadog specializes in analyzing machine data. Clients can monitor their entire IT infrastructure. On Feb. 10, Datadog completed the acquisition of collaboration platform CoScreen to enhance its real-time communication capabilities.
Datadog released Q4 2021 results on Feb. 10. Revenue rose 84% YOY to $326 million. Adjusted net income jumped 289% to $70.6 million, or 20 cents per diluted share, up from $19 million in the prior-year period. Cash and equivalents ended the period at $274.5 million.
On these metrics, CEO Olivier Pomel commented, “We are proud of our strong execution in fiscal year 2021, with 70% year-over-year revenue growth, $287 million in operating cash flow, and $251 million in free cash flow.”
Datadog has more than 2,000 customers each with an annual recurring revenue of at least $100,000. The client base represents a 63% YOY increase. In addition, cross-selling strategies have brought revenue growth, leading to analyst upgrades. The cybersecurity company anticipates revenue of $1.51 billion to $1.53 billion for fiscal 2022, implying up to 48% YOY growth.
DDOG stock is currently priced around $157, up more than 50% over the past year. But it is down about 12% since the start of the year. Shares are trading at 313 times forward earnings and 47.8 times trailing sales. The 12-month median price forecast for Datadog stock stands at $210.
Analyst Upgrades: Hubspot (HUBS)
52 week range: $403 – $866
Customer relationship management (CRM) specialist HubSpot offers a cloud-based marketing and customer service software platform. The company has recently added e-commerce and payments features as well.
Hubspot released Q4 2021 results on Feb. 10. Revenue jumped 47% YOY to $369 million. Net income was $29.6 million, or 58 cents per diluted share, compared to $20.1 million, or 40 cents per diluted share, in the prior-year quarter. Cash and equivalents ended the period at $1.37 billion.
Investors were pleased the software group expanded its customer base while also growing its average subscription revenue. It now has 135,442 clients, up 30% YOY. Subscription revenue grew 47% YOY. The average revenue per subscriber increased 11%.
Management credited high renewal rates and rising contract sizes as key growth drivers. As a result, HubSpot is guiding for Q1 2022 revenue of roughly $382 million and adjusted earnings per share (EPS) of 47 cents. These numbers represent a YOY growth of 36% and 38%, respectively. Wall Street was pleased with the results.
HUBS stock has declined around 44% from its November high. It is currently trading around $480, down 27% YTD. Nonetheless, shares are still frothy, trading at 204 times forward earnings and 17.9 times trailing sales. The 12-month median price forecast for Hubspot stock stands at $700.
52-week range: $118.07 – $223.32
Williams-Sonoma is one of the largest pure-play home goods retailers stateside. It currently has just under 600 stores. Stay-at-home days of the pandemic as well as higher house prices meant increased spending on home furnishings.
Management announced Q3 2021 metrics on Nov. 18. Revenue grew 16% YOY to $2.05 billion. Non-GAAP operating income came in at $333 million, or $3.32 per diluted share, up from $276.8 million, or $2.56 per diluted share, a year ago. Cash and equivalents ended the period at $657 million.
Williams-Sonoma has been focusing on growing the digital business as well. 67% of its Q3 revenue was derived from e-commerce.
The highly-profitable retailer forecasts an adjusted operating margin of 17% for 2021, up from 13% in 2020. Wall Street was pleased with these metrics.
After the announcement, CEO Laura Alber remarked, “As a result, we are raising our full-year outlook to reflect revenue growth of 22% to 23% and operating margins of 16.9% to 17.1%.”
WSM stock exchanges hands around $133, up 3% over the past 12 months. YTD, it has declined 21.6%. Shares are trading at a cheap valuation of just 10.7 times forward earnings and 1.4 times trailing sales. The 12-month median price forecast for Williams-Sonoma stock is $187.50. Interested readers could find value around these levels.
Analyst Upgrades: Zurn Water Solutions (ZWS)
52-week range: $28.98 – $65.68
Milwaukee, Wisconsin-based Zurn Water Solutions is a pure-play engineered water solutions company. Its expertise ranges from water safety and plumbing to quality, flow control and sustainability.
Zurn Water released Q4 2021 results on Feb. 1. Net sales increased 23% YOY to $232 million. Adjusted net income came in at $28.9 million, or 22 cents per diluted share, up from $11.4 million in the prior-year quarter. Cash and equivalents ended the period at $96.6 million.
ZWS shares have soared 15% since Zurn Water’s announcement on Feb. 14 that it will combine with privately-held sink manufacturer Elkay Manufacturing. Zurn shareholders are expected to have a 71% stake in the combined company. Management expects to bring in “$50 million in run-rate cost synergies” with the merged company.
Zurn CEO Todd Adams remarked, “The combination puts us well on our way to doubling the size of the business over the next couple of years … We also add the high-growth, and increasingly essential, drinking water sector in our portfolio.”
ZWS stock hovers around $33, down 28% over the past 12 months. Shares are trading at 24.6 times forward earnings and 4.6 times trailing sales. The 12-month median price forecast for ZWS stock stands at $43. The stock has had a recent analyst upgrade as well.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.