The market appears unsure of how to value tech stocks in 2022. Markets have seen increased volatility, and it isn’t rare to see our favorite tech names drop several percentage points one day, only to come storming back the next.
Some of this is due to the highest inflation in the last 40 years. The rate rose by 8.5% in March relative to the rate in the prior year, due in large part to food and gas costs. This has sparked fears that an economic slowdown or even recession could hit as the Federal Reserve raises rates. Investors are understandably jittery.
There is plenty of good news as well if we know where to look. While the March inflation figures were sour, there were encouraging signs, such as declining prices for used vehicles. Many tech companies are still posting record earnings, and the tepid market could be enticing for long-term investors.
Shares of Microsoft ( MSFT -2.71% ) have fallen more than 15% this year, and the stock is nearly 20% off its 52-week high. This is despite the company posting record results and releasing big news on the mergers and acquisitions (M&A) front. The stock now trades at a price-to-earnings (P/E) ratio not seen since the market recovered from the March 2020 crash.
Microsoft posted terrific earnings in the second quarter of fiscal year 2022 (period ended Dec. 31), with sales exceeding $51 billion. This amounts to a 20% gain over the same period in fiscal 2021. Even better, operating income rose 24% over the same period as the company continued to push margins higher. The Microsoft Cloud was again a significant catalyst, with a 32% increase in sales.
Microsoft trails only Amazon ( AMZN -2.46% ) in cloud market share. The cloud offers a tremendous runway, with the total market set to explode in the coming years. Microsoft is also a critical company when it comes to cybersecurity. The company recently reported that it was able to disrupt a group of Russian-backed hackers targeting Ukraine. In addition, Microsoft launched a campaign in late 2021 to address our nation’s cybersecurity workforce shortage. Initiatives like this keep Microsoft on the cutting edge and ensure that the company remains a vital force in society — music to the ears of long-term investors.
On the M&A front, Microsoft made an enormous splash by announcing the $69 billion Activision Blizzard ( ATVI -0.21% ) deal. This acquisition will make Microsoft the third-largest gaming company by sales, provided it clears regulatory hurdles. Gaming is the fastest-growing form of entertainment, according to the company. This deal cements Microsoft as a leader in three fast-growing industries; gaming, cloud computing, and cybersecurity.
2. Palo Alto Networks
Regarding cybersecurity, Palo Alto Networks ( PANW -0.35% ) continues to post tremendous results in this critical industry. Palo Alto is an industry leader in endpoint protection and network firewalls. The company continues to make waves in cloud security, including the recent announcement of the Palo Alto Network Cloud Next-Gen Firewall for Amazon Web Services. This comes amid the release of 22 major products in the first half of fiscal 2022.
Investors should also be pleased with Palo Alto’s growing revenue and impressive remaining performance obligation (RPO). Sales reached $1.3 billion in Q2 FY22 (period ended Jan. 31) through 30% year-over-year growth. The RPO, or revenue that will be recognized in future periods from current contracts, swelled to $6.3 billion at the end of Q2 FY22. For perspective, the company’s total market cap is around $62 billion or less than 10 times the RPO.
Palo Alto trades at a reasonable valuation, especially compared to other industry players. Relative newcomers like CrowdStrike ( CRWD -1.93% ) and Zscaler ( ZS -4.31% ) trade at price-to-sales (P/S) ratios well over 30. As shown below, even Fortinet ( FTNT -2.67% ) is trading at a higher P/S ratio.
CrowdStrike and Zscaler are growing sales faster than Palo Alto; that’s a given. However, Palo Alto’s 30% growth is nothing to sneeze at. Palo Alto may be just the ticket for long-term investors looking for value in the cybersecurity space.
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