- The has led gains on Wall Street in 2023, outperforming the Dow and S&P 500
- Tech growth names have come back in favor as receding inflation fears drive hopes of smaller rate hikes this year
- As such, I recommend buying CrowdStrike and Splunk as the tech trade returns after a long break
The has been the best performer of the three major US indices so far in 2023, powered by signs that may have peaked as well as easing Fed rate hike bets.
After a dismal 2022, the technology-heavy index is up nearly 8.3% through the first 25 days of the new year, compared to a 4.6% gain for the benchmark, and a 1.7% increase for the .
Shares of some mega-cap companies have shot higher, with Tesla (NASDAQ:), Amazon (NASDAQ:), Alphabet (NASDAQ:), Meta Platforms (NASDAQ:), Nvidia (NASDAQ:), and Netflix (NASDAQ:), posting double-digit year-to-date percentage increases as investors rotate back into beaten-down growth stocks of yesteryear.
Taking that into account, I recommend buying shares of CrowdStrike (NASDAQ:) and Splunk (NASDAQ:) as high-growth names come back in favor after a long break.
CrowdStrike
Widely viewed as one of the leading names in the cloud-based cybersecurity industry, I believe CrowdStrike’s stock is well worth buying amid the challenging macroeconomic and geopolitical climate, especially at current valuations.
In my view, the tech company — which provides cloud workload and endpoint security, advanced threat intelligence, and sophisticated cyberattack response services — looks to be one of the main beneficiaries of the ongoing surge in global cyber spending from corporations and governments as they respond to growing digital security threats.
Not surprisingly, out of the 44 analysts covering CrowdStrike, per an Investing.com survey, the consensus recommendation comes to ‘outperform’ with extremely high conviction. Among those surveyed, shares had a roughly 64% upside potential based on Tuesday’s closing price, reflecting its strong fundamentals and long-term growth prospects.
Source: Investing.com
The next major upside catalyst is expected to arrive when CrowdStrike reports fourth-quarter financial results after the US market closes on Thursday, March 9. The information security specialist has topped Wall Street’s expectations for earnings and revenue in every quarter since going public in June 2019 , underlining the strength of its underlying business.
An InvestingPro survey of analyst earnings revisions points to soaring optimism ahead of the earnings update, with analysts raising their EPS estimates 29 times in the last 90 days, while making no downward revisions.
Source: InvestingPro
Consensus estimates call for earnings per share to accelerate for the seventh consecutive quarter to , according to Investing.com, improving 43.3% from EPS of $0.30 in the year-ago period. If that is in fact the reality, it would mark the most profitable quarter in CrowdStrike’s history.
Meanwhile, Q4 revenue is forecast to jump 45.5% year-over-year to a record $627.1 million, thanks to an expected boost in demand for its cloud-based cybersecurity platform, which is used to detect and prevent security breaches.
The security software provider said it added 1,460 net new subscription customers in the last quarter for a total of 21,146 subscription customers as of Oct. 30, representing 44% growth year-over-year.
After rallying to a record of $298.48 in November 2021, CRWD stock — down by 37.5% over the past year — tumbled rapidly to a low of $92.25 on Jan. 10. CrowdStrike shares have since clawed back some losses, closing at $104.60 on Tuesday, but they still stand roughly 65% below their all-time high.
At current levels, the Austin, Texas-based endpoint security leader has a market cap of $24.5 billion, a steep discount to its peak valuation of $67 billion.
Splunk
With organizations and large enterprises growing increasingly keen on finding solutions that can collect, sort through, and analyze their wealth of data, Splunk has rapidly transitioned into one of the go-to names in the space, making it an ideal buy for the months ahead .
While Splunk has enjoyed a powerful rebound since seeing its stock drop to a bear market low of $65 in mid-October, shares remain a far cry from the highs of late 2020. Despite the recent recovery, SPLK has fallen roughly 24% over the last year and is down 59% from its record peak of $225.89.
SPLK ended at $92.32 last night, earning the San Francisco, California-based company a market cap of $15.1 billion, well below a valuation of almost $36 billion at its peak.
I expect Splunk — which has beaten Wall Street’s top line expectations for eight straight quarters dating back to Q4 2020, while trailing profit estimates only once in that span — to deliver upbeat earnings when it releases its latest quarterly results on Thursday, March 2 after the closing bell.
Indeed, data from InvestingPro suggest that Wall Street analysts are extremely optimistic ahead of the report, with analysts increasing their EPS estimates 33 times in the past 90 days to reflect a whopping increase of over 1,000% from their initial expectations. The upward revisions follow a strong earnings result in late November that sent shares surging upward.
Source: InvestingPro
Consensus calls for the data analytics software company to deliver earnings per share of $1.15, jumping 74.2% from EPS of the year-ago period. If that is in fact the reality, it would mark the most profitable quarter in Splunk’s history since going public in 2012.
Revenue is expected to top $1 billion for the first time ever, with sales forecast to climb 61% yoy to $1.07 billion amid favorable business trends as it completes its transition from a perpetual license to a software-as-a-service subscription-based model .
The switch to a SaaS business model will likely see the company generate higher annual recurring revenue, greater profitability, and improved free cash flow in the quarters ahead.
As such, I believe investors now have an opportunity to build a position in a great company at a great price.
Source: Investing.com
Wall Street has a long-term bullish view on SPLK stock, with all 42 analysts surveyed by Investing.com rating it as either a ‘buy’ or ‘hold’. Shares have an average analyst price target of around $111, representing an upside of roughly 20% from current levels. Likewise, the quantitative models in InvestingPro point to a gain of 22.6% in Splunk’s stock, bringing shares closer to their fair value of $113.15.
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Disclosure: At the time of writing, I am short on the S&P 500 and Nasdaq 100 via the ProShares Short S&P 500 ETF (SH) and ProShares Short QQQ ETF (PSQ). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies’ financials.
The views discussed in this article are solely the author’s opinion and should not be taken as investment advice.