A bear market is defined by a decline in the value of a financial asset or index by 20% (or more). At this moment, the Nasdaq-100 The tech index is down 29% in 2022 so far, and if the year ended here, it would be its worst showing in a decade. In fact, it would be the biggest annual decline since the 2008 global financial crisis.
But that doesn’t have to be bad news for investors. Bear markets tend to drive large-scale selling, which means many quality stocks are shelved – and this presents an opportunity for investors willing to put some money to work, especially over the long term.
A panel of Motley Fool contributors identified Datadog (DOG 7.62%), pinterest (PINS 4.45%)and Arista Networks (A NET 1.24%) only three stocks to buy in the heart of this bear market. Here’s why.
A critical cloud monitoring tool, and an optimistic tone
Anthony DiPizio (Datadog): When it comes to scouring this bear market for quality opportunities, a company that has raised its 2022 sales forecast for three consecutive quarters could be a good place to start. Cloud computing has opened countless doors for small and large businesses as it allows them to move their operations online and create more customer touchpoints without the need for additional physical stores.
But a company may find it difficult to monitor the performance of its vast online presence or to learn from it. That’s where Datadog comes in – whether it’s entertainment, healthcare, gaming, or retail, Datadog’s platform is designed to quickly alert businesses to technical issues for resolution. as quickly as possible.
Some problems can be almost invisible under normal circumstances; a particular webpage may load too slowly, or a specific customer segment in a geographic location may have difficulty accessing the company’s website. Either way, it’s Datadog’s job to bring these issues to light so they can be detected quickly.
The company has just released its financial results for the third quarter (ended September 30). It increased its revenue by 61% to $437 million, leading to an increase in its full-year guidance to $1.654 billion at the high end of the range. It follows upward revisions in the first and second quarters, and Datadog is one of the few companies to strike such an optimistic tone in this difficult economic environment. Many companies actually reduce their forecasts instead.
Much of Datadog’s growth is coming from large organizations, which makes sense because the bigger the company, the more it will rely on cloud-based infrastructure. In the third quarter, Datadog had 2,600 customers spending at least $100,000 per year, representing a 44% year-over-year increase.
With Datadog’s stock down 61% from its all-time high, this could be a headline that was prematurely dismissed. This is an opportunity for investors buying now.
A falling top social media stock
Jamie Louko (Pinterest): Investors smashed the dislike button on social media stocks as many struggled to retain users and saw ad revenue fall off a cliff. Take Metaplatforms (META 1.03%), for example. In the third quarter, revenue fell 4% year over year, and monthly active users grew only 2% over the same period.
Pinterest, however, bucks this trend. It has struggled over the past year, but the company seems to be coming out the other side of the tunnel. The social media platform saw sequential user growth of 12 million in the third quarter, reaching 445 million monthly active users.
The company also grew monetization faster than its social media rivals in the third quarter. Instantaneous (INSTANTANEOUS 7.92%) saw global average revenue per user (ARPU) drop 11% from the prior year quarter to $3.11. Comparatively, Pinterest increase its overall ARPU of 11% over the same period, to $1.56. Snap’s ARPU outside North America and Europe also fell 9%, but Pinterest’s ARPU in the same region soared 38% to $0.11.
How can Pinterest continue to attract ad spend while its rivals are struggling? CEO Bill Ready said it best during the company’s third quarter earnings call:
Pinterest is a unique place for advertisers because our users seek inspiration and discovery with intention and purpose. This has a number of implications. For starters, we have proprietary signals on the platform, such as table searches, saves, and curation, which result in very valuable and monetizable customer information for advertisers.
However, this does not come at the expense of profits. The company generated $61 million in net income and $591 million in free cash flow over the past 12 months.
Despite this competitive outperformance, Pinterest trades at just 26x free cash flow, well below Snap’s valuation of 120.5x free cash flow. With Pinterest falling alongside the Nasdaq, now might be the time to buy some shares of this top social media stock.
The Technology Powering Modern Data Centers
Trevor Jennewine (Arista Networks): Arista specializes in data center networking. It provides the switches, routers, and wireless access points needed to create and connect networks, along with adjacent software for network automation, telemetry, and security. Arista first introduced its technology in the cloud, but it has since expanded to enterprise data centers and campus workspaces.
Management says its main innovation is the Extensible Operating System (EOS), software that relies on artificial intelligence to keep networks performing and secure. A single version of EOS runs on every Arista switch and router, allowing customers to integrate their entire IT ecosystem — from public clouds and private data centers to corporate campus workspaces — into a unified network.
This differentiates Arista from traditional vendors like Cisco, which tend to complicate network management by using different operating systems in different environments. Arista removes this complexity. EOS works everywhere, making it easier for IT teams to update software, test new features and automate workflows. This reduces the total cost of network ownership for customers.
Arista has capitalized on this advantage to become the leader in high-speed data center networks. It currently holds 41.5% market share in 100G, 200G and 400G switches (the fastest widely adopted switches on the market), while Cisco, which takes second place, holds 22.5% share in market. This leaves Arista well positioned for the future. Trends such as cloud computing and data-intensive applications (such as artificial intelligence and 5G) will continue to strain data centers, creating a need for faster networking solutions.
Despite economic headwinds, Arista recently reported stunning third quarter financial results. Revenue soared 57% to $1.2 billion and GAAP earnings climbed 61% to $1.13 per diluted share. But Arista still has plenty of room to run. Management estimates its market opportunity at $35 billion by 2025, and this figure is expected to continue to grow as data centers require faster networking solutions to keep pace with the ever-changing computing world. . That’s why this growth stock is worth buying today.
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