The past year has been brutal, especially for tech investors. The Nasdaq Composite remains in bear market territory, having fallen 22% and around 30% below its all-time high over the past 12 months.
Things have been even worse for many individual tech stocks. Many quality companies are randomly sorted out, creating opportunities for the patient and long-term oriented investor. There are three smart buys right now alphabet (GOOGL -1.08%) (WELL -1.04%), block (SQ -0.37%)and doximity (DOCS 0.80%). Here’s why.
Alphabet: A tech titan too cheap to ignore
Alphabet, parent company of the internet search engine Google, needs no introduction. It’s one of the largest and most powerful organizations out there. For the past two decades or more, Google’s digital advertising-powered empire has managed to grow steadily through good times and bad.
Still, Alphabet stock is down 27% over the past year and down more than 30% from its all-time high. This is a blue-chip name in the tech world, so what’s Google eating? Investors fear a recession could put the internet giant in trouble. As demonstrated in 2008 and 2020, an economic downturn means less advertising activity and less advertising monetization. In short, a recession would likely mean a drop in sales for Alphabet.
However, the company has also shown that online search ads are fairly resilient — even in a recession. Digital marketing has an easy-to-flick on/off switch. Given that many brands will die if they turn off the switch, even a recession can’t hold back marketing activity for too long. When Alphabet has seen sales decline in past recessions, it’s proven to be very short-lived.
This advertising empire has more challenges ahead, such as: B. increasing regulatory scrutiny of its online activities and allegations of suppressing competition. Suppress competition or not, some of Google’s competitors like it The trade desk (TTD -4.79%) make progress. But Alphabet benefits from participation in a huge and growing digital advertising industry and is more diversified than ever. A gargantuan balance sheet with nearly $120 billion in cash and short-term investments minus debt doesn’t hurt either.
Alphabet shares now trade at just 20 times trailing-12-month free cash flow. That strikes me as mighty cheap for a sustained growth company so deeply embedded in the fabric of the global economy. I am a shopper.
Block: Surprise! Block is actually profitable on this key metric
Block, formerly known as Square, has continued its steady expansion into the financial industry. Starting with merchants with its ecosystem of digitally integrated point-of-sale solutions and financial management services, Block has made rapid strides with consumers over the past few years with the Cash App. Even so, the stock has fallen a whopping 76% over the past year.
Some investors are questioning the company’s bets Bitcoin (BTC -1.47%) as a future internet-based currency. Bitcoin wasn’t entirely bad for Block, however. Enabling bitcoin trading helped Cash App quickly onboard millions of users during the pandemic. Once in the ecosystem, Cash App can offer even more valuable services to these new users. The commerce services segment and cash app, now a pervasive fintech in the US, is now making a concerted push internationally, where Block has few users and plenty of untapped potential.
The company recently acquired Afterpay (which has a strong presence outside of the States) to strengthen the connections between its merchant and consumer apps. And Block just announced a new partnership with an international digital payments superstar adyen (ADYE.Y -1.52%) Add Cash App Pay as a checkout option for Adyen’s major US retailers. Perhaps that will also pave the way for deeper integration overseas. We will see.
Despite spending heavily on expanding the list of capabilities and marketing, Block is now profitable on a free cash flow basis. In fact, Block has delivered healthy free cash flow-per-share returns for shareholders over the past five years. The stock now trades for just under 60 times enterprise value relative to free cash flow. I’m not saying this is a “cheap” stock. But given the company’s solid execution of its expansion, now looks like a fantastic time to buy for the long term.
Doximity: Focused on growth, but above all on profitable growth
Let’s visit the healthcare industry, which is often seen as a stable place to hoard money during uncertain times. Yet even healthcare stocks have turned it on its head during the current bear market. Judging by the Vanguard Healthcare ETF (VHT -0.77%)US healthcare stocks are down 13% from all-time highs.
However, health tech fares far worse, including Doximity. This small business that connects healthcare professionals, pharmaceutical companies and patients through a unified app has had a tough time this year. The stock is down around 70% since its peak in fall 2021.
Although Doximity had a big markup last year, there’s still a lot to like about this company right now. Management has always focused on growing profitably. While the growth trajectory is slowing this year due to macro factors (sales are now expected to grow 25% in fiscal 2023), it remains a very profitable business. Free cash flow profit margin was 36% over the trailing 12 months.
What’s notable is that tech companies have a successful track record in America’s massive but incredibly complex healthcare sector. Where many have failed, Doximity makes a pretty good way. The stock now trades at 39 times enterprise value on free cash flow. Again, this isn’t a cheap stock, but it’s not a bad price tag if you think Doximity, with its communications-focused healthcare application, will continue to grow its sales and profits. I for one think it will be and am still a buyer.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Nicholas Rossolillo and his clients have positions in Alphabet (C shares), Bitcoin, Block, Inc., Doximity, Inc., The Trade Desk and Vanguard Health Care ETF. The Motley Fool has positions in and recommends Adyen NV, Alphabet (A shares), Alphabet (C shares), Bitcoin, Block, Inc., Doximity, Inc., and The Trade Desk. The Motley Fool recommends Adyen. The Motley Fool has a disclosure policy.