Last year was exceptionally difficult for many investors. S&P 500 And this Nasdaq Composite The US economy was in tatters due to high inflation and rising interest rates and fell into bear market territory. In fact, both indexes are set to fall more rapidly in 2022 than in any year since the Great Recession in 2008.
Luckily, there is a silver lining to that difficult situation. Every US bear market in the past, regardless of its duration or severity, has ended in a bull market, and there’s no reason to expect a different outcome this time around. During this time investors have a chance to buy such great shares. cloud flare (net 3.32%) and Microsoft (MSFT -0.20%) while they are still trading at discounted prices.
Cloudflare: A Disruptive Cloud Computing Company
Cloudflare is becoming a cloud computing giant. It began as a simple content delivery network (CDN), but its portfolio now includes a wide range of application, network, and security services that protect and accelerate corporate infrastructure and software. Cloudflare also offers compute and storage services through its developer platform, which means businesses can build performant software and websites directly on their networks.
The cloud computing industry is highly competitive, but Cloudflare operates the fastest cloud network and developer platform on the market. In fact, it can deliver content to 95% of the Internet-connected population within 50 milliseconds. That momentum has helped Cloudflare achieve a leadership position in CDN software and edge development platforms, and the company is also gaining momentum in other cloud verticals, including zero-trust security.
Cloudflare reported monstrous financial results in the third quarter, extolling the economic headwinds affecting so many businesses. Its customer base grew 18% to 156,000, and the average customer spent 24% more than last year. In turn, revenue rose 47% to $254 million in the third quarter, and the company reported a non-GAAP profit of $0.06 per diluted share, up from $0 per share in the prior-year period.
Looking forward, Cloudflare should have no problem maintaining its rapid growth trajectory, as it has barely scratched the surface of its $125 billion total addressable market (TAM). In fact, management expects revenue to grow fivefold over the next five years, even if the company doesn’t roll out any new products. This implies annual revenue growth of 38% through 2027. Of course, Cloudflare has rapidly built out new products throughout its history, so investors have reason to believe it will grow its top line even faster.
With that in mind, shares currently trade at 20.5 times sales. That’s a fair valuation for a business growing as fast as Cloudflare, and it’s an absolute bargain compared to its three-year average of 41.8 times sales. Hence this growth stock is worth buying today.
Microsoft: the best software company on the planet
Microsoft recently reported disappointing financial results for the second quarter of its fiscal year 2023, which ends on December 31. Revenue rose just 2% to $52.7 billion, a significant drop from the 20% growth it achieved in the prior-year period, while GAAP earnings slipped 11%. % to $2.30 per diluted share. Unfortunately, the short term outlook is equally grim. Management expects 3% revenue growth in its fiscal third quarter as unfavorable exchange rates and macroeconomic conditions continue to weigh on the business.
Fortunately, there is a glimmer of hope for patient investors. Microsoft stock has declined more sharply during the current bear market than at any other time in the past decade, but the economic headwinds responsible for that decline should prove to be temporary problems. In addition, Microsoft provides a wide range of mission-critical software products and cloud services to hundreds of thousands of businesses, and that positions the company to rekindle growth when the economy improves.
In fact, according to research company G2, Microsoft ranked as the best software vendor worldwide last year. This recognition was based on its high user satisfaction scores and its leadership position in several software markets. Of course, Microsoft 365 is the gold standard in office productivity software, but G2 analysts also recognize the company as a leader in areas like enterprise resource planning and cyber security, and both of those markets are expected to grow at a double annual rate. Is. According to Grand View Research, the percentage of marks by the end of the decade.
Meanwhile, Microsoft Azure is steadily gaining market share in cloud computing. After taking 2 percentage points over last year, it now accounts for 23% of cloud infrastructure and platform services (CIPS) spending, making it the second largest CIPS vendor by a wide margin. This positions Microsoft for tremendous growth in the coming years, as cloud computing spending is expected to grow an average of 16% annually to reach $1.6 trillion by 2030.
Finally, Microsoft has quietly become the world’s seventh largest digital advertising publisher, and its partnership with Netflix That should help the company capture its share of online video advertising, a market expected to grow at an average of 14% annually to reach $362 billion by 2027.
The upshot is this: Microsoft is well positioned to grow its revenue at an annual double-digit percentage pace for the foreseeable future, which justifies its current valuation of 9.4 times sales. So investors should grab this once in a decade buying opportunity.