This year has been rough for Cathie Wood’s Ark Invest . Many of the names in her firm’s funds have been clobbered as tech stocks (and momentum stocks in general) have fallen out of favor. These stocks are companies that still have market-leading positions, with sound fundamentals.
The sell-off in tech allows buyers to pick up some world-class companies at steep discounts to recent prices. Here are three names to keep in mind.
1. DocuSign is poised to disrupt the legal profession
DocuSign ( DOCU 3.75% ) is known primarily for its electronic signatures and was considered one of the classic pandemic plays. When offices were shut down, its document-signing technology became commonplace, and growth accelerated. DocuSign’s stock price rose like a moonshot in 2020 as investors saw adoption continuing to accelerate.
However, the sheen came off in late November when the company reported third-quarter numbers. The market downgraded the stock on disappointing growth. Since then, the stock is down about 70%.
One of the reasons I like the stock is that it has the potential to disrupt an industry ripe for disruption: the legal industry. DocuSign’s Agreement Cloud is already automating many of the legal duties of the typical company. Docusign purchased legal AI company Seal, which can review legal documents way faster than people can.
At current levels, the stock trades at 32 times this year’s expected earnings per share. Docusign traded at triple-digit price-to-earnings ratios during the height of the COVID-19 pandemic. The technology and the prospects for the company have not changed, and the multiple is much more reasonable now.
2. With its iBuying mistake behind it, Zillow sees stronger growth ahead
Zillow Group ( Z 4.33% ) ( ZG 4.34% ) is another highflier that has come crashing back to Earth. The company’s ill-fated foray into house-flipping is over, and the company has sold almost all of its underwater inventory. Essentially, Zillow believed its iBuying venture could use its pricing model to buy properties directly from sellers, charge a fee, and stage and resell the property for a quick profit. It turned out the the company overpaid on some properties, and the earnings stream from the business simply became too volatile.
Zillow is back to its traditional business of modeling home prices, showcasing property listings, referring borrowers to Realtors, and making mortgage loans. The company estimates that two-thirds of homebuyers in 2021 were on Zillow’s site. On the fourth-quarter earnings conference call, the company projected that it will hit $5 billion in revenue by the end of 2025, with 45% earnings before interest, taxes, and depreciation & amortization (EBITDA) margins. This would mean $2.25 billion in EBITDA by 2025. Last year, the company earned only $195 million in EBITDA, although that number was depressed by the homebuying business.
Zillow trades at about 36 times expected 2022 earnings per share — much lower than the triple-digit P/E ratio it used to have, even as the company remains a market leader.
3. Block has a big multiple but even bigger growth
Block ( SQ 5.17% ), formerly known as Square, allows people to accept credit card payments via their phones. The company’s revenue increased stock 86% last year and increased EBITDA by 114%. The company competes primarily with Paypal‘s Venmo app.
The company has been reporting strong earnings, but the rout in tech stocks has taken the multiple down a notch. Block is trading at about 75 times expected 2022 earnings per share; however, that multiple is still lower than the rate the company has been growing EBITDA. Like the other stocks, Block used to have a triple-digit P/E. Block’s fintech and traditional financial infrastructure make it one of the leaders in the payments industry.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.