When it comes to investing in the tech space, not many investors have felt smart over the past year. With the Nasdaq officially in a bear market (a 20% drop from recent highs), there are a bunch of unhappy tech sector shareholders out there. However, this market won’t last forever, and by focusing on solid businesses, investors can use the down market to their advantage and buy shares at deep discounts.
It’s fair to say many, if not most, technology stocks got ahead of themselves over the past few years and saw their share prices increase in a way that was detached from the fundamentals of the business. However, none of that changes the underlying strength of these businesses. With stocks trading for a more reasonable valuation, now is a great time to pick up shares.
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1. Nvidia
Nvidia ( NVDA 1.10% ) has come a long way since its beginnings as a PC graphics company. As the world’s reliance on more and more powerful computers has grown, so has Nvidia’s business. The company sells products for gaming, professional visualization, data centers, and the automotive industry.
Nvidia reported the fourth-quarter and fiscal year 2022 (period ended Jan. 30) earnings recently, and the results were impressive. Overall revenue for fiscal 2022 reached $27 billion, an increase of 61% over 2021. The company’s gaming, data center, and professional visualization segments each reached record revenues for both the quarter and the year. This strong revenue growth translated to the bottom line as well. Fiscal year gross margin improved 260 basis points, operating income grew 122%, and net income increased 125%.
Not only is Nvidia seeing growth in almost all its business segments, but each is also an area where there is plenty of growth ahead. The professional visualization segment, which helps power things like virtual car showrooms, surgical training, and architectural walkthroughs, grew 109% in Q4. With all the talk about the metaverse being the next big thing, it’s clear that Nvidia will be at the center of that trend.
Nvidia’s price-to-sales ratio is currently 22, and its price-to-free cash flow multiple is 77. Neither would be considered cheap, but both are almost 40% lower than their recent highs. The most recent results show that Nvidia is as strong as ever. On top of all of that, analysts expect the company’s earnings to grow around 30% annually for the next five years, and shares can be purchased now for a decent discount.
2. Coinbase
While cryptocurrencies have been impacted by the recent market decline, their growth over the past several years is undeniable. The total crypto market cap reached $2.3 trillion in 2021, up from $123 billion in 2018. One of the primary ways investors buy and sell cryptocurrencies is by using Coinbase ( COIN 2.72% ). After closing at $328.28 on the day of its direct listing, Coinbase has fallen dramatically. At the time of this writing, shares are trading for nearly $175. Despite this, Coinbase has put up strong results.
Revenue for 2021 was $7.4 billion, compared to $1.1 billion in 2020, a 544% increase. Net income improved by 1,025% to $3.6 billion. Coinbase’s key business metrics were impressive as well. Monthly transacting users, trading volume, and assets on the platform grew 307%, 765%, and 209%, respectively. This level of growth will not last forever, but it does show that Coinbase is in the right place at the right time to benefit from the parabolic growth in crypto assets.
Now, there’s no guarantee that crypto will keep growing at the rate it did in 2021, and any significant slowing in crypto transactions would have a serious negative impact on Coinbase’s business. That said, Coinbase has established itself as one of the most trusted crypto exchanges, which should give it a leg up on its competition. There also doesn’t seem to be any evidence yet of the crypto market cooling off. In Q4, monthly transacting users increased 54% over Q3, which was actually an acceleration over a sequential decline from Q2 to Q3.
The unpredictability of the crypto market may be what’s making the stock so affordable. Coinbase currently trades for only five times sales, making it as cheap now as it’s ever been. Considering its recent results, buying shares at this valuation could be a smart move.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
