Countless fears have conspired against the stock market so far this year, including inflation and sharp interest rate hikes by the Federal Reserve to help control soaring prices, supply chain disruptions, and the war in Ukraine. Tech stocks in particular are not favored at the moment as the market is flocking to investments in energy and physical infrastructure. The Nasdaq Composite It’s down about 28% from its all-time high.
Amidst the pain in the stock market, though, companies that specialize in tech infrastructure are actually doing quite well. Money is pouring into tools to enable cloud computing and related next-generation technology initiatives. Three thriving companies Digital Ocean Holdings (DOCN -5.63%)And Twilio (TWLO -5.27%)And fortinet (FTNT -0.32%). Here’s why I buy the three tech infrastructure stocks in my book.
1. DigitalOcean: A Ridiculous Sale To The Leader Of The Independent Public Cloud
Much of the narrative surrounding the recent sell-off in high-growth technology stocks has to do with rising interest rates. The internal mechanism that governs short-term stock prices uses interest rates to discount expected future cash flows. Thus, as interest rates rise, the present value of the shares decreases. What were once high-growth but not-for-profit companies trading at more than 20 times expected sales have been subject to mediocrity.
One such example is DigitalOcean. But there is one big caveat. This cloud computing platform company is growing rapidly And It’s profitable, at least on a free cash flow basis. During the first quarter of 2022, revenue increased 36% year over year to $127 million, and free cash flow was $5 million. That’s a small profit margin, but a lot of it is tied to the timing of payroll taxes and other seasonal expenses. For the full year of 2022, CEO Yancy Spruell and the senior team believe revenue will rise about 32% year over year, and free cash flow margin will improve to at least 8% of total sales.
DigitalOcean is able to implement its fast growing and efficient business model by generating hundreds of thousands of visitors to its website every month with free educational content for software developers. To further this strength, DigitalOcean has acquired an educational site called CSS Tricks, which receives 3 million unique visitors each month. To complement this strategy, DigitalOcean also began building a sales team that contributed 3% to overall growth last quarter.
In the next few years, DigitalOcean believes it will maintain a revenue growth rate of at least 20% and remain profitable along the way. Despite its respectable expansion since its initial public offering in early 2021, the shares are down 24% from where they first appeared in public trading, valued at just 4.7 times expected one-year forward sales. If you thought public cloud computing had a long way to go, this small company looks like a great deal right now.
2. Twilio: Migrate business communications to the cloud
After decades of development, we are now entering the fifth generation of mobile network services (also known as “5G”). But 5G networks are no longer just about smartphones. High-speed internet is becoming ubiquitous, and as it stands, communication tools are evolving beyond traditional mobile conversations and texts.
This is where Twilio comes in. The company operates a cloud library of software that helps companies build communication tools that meet the modern needs of their customers and employees. Among these apps are everything from text messaging (a low-margin but profitable business that Twilio uses to invest in new things) to video, online chat bots, and customer interaction analytics. Flex is an integrated call center toolkit that businesses can deploy to make their customer service operations more efficient.
Flexible, cloud-based communication tools that break down barriers of traditional voice and text are in great demand, and as a result Twilio is on fire. First-quarter 2022 revenue increased 48% year-over-year to $875 million (or 35% year-over-year increase). Over the next few years, CEO Jeff Lawson believes organic growth of at least 30% per year can be achieved. The difficulty many investors have with the company is that it’s losing money right now – though that’s intentional, as it’s reinvesting all of its profits plus a little extra to fuel expansion. However, with a solid balance sheet of $5.2 billion in cash and short-term investments offset by debt of just $986 million, Twilio is in good shape to keep the pedal in the metal.
After being attacked by the market, Twilio is now trading at less than 3.7 times its one-year forecast sales. If profitability is what you’ve been waiting for, management thinks they’ll start to achieve that (on an adjusted basis) in 2023. This communications software platform looks really cheap right now if you think Twilio could pull its ambitious financial guidance out over the next few years.
3. Fortinet: New clouds need new data centers and new security hardware
Find a company with a proven track record of growth And Too profitable? Check out Fortinet, a “legacy” cybersecurity company that provides firewalls (devices that monitor traffic in and out of a physical location) and related hardware.
I put the term “legacy” in quotes because while cloud-native security products are popular right now, there’s nothing old-fashioned about what Fortinet offers. Sure, remote work has changed the game. More workers are accessing employer data and work applications from outside the office than ever before. This is where businesses love CrowdStrike They make their own straw. But with the spread of cloud computing, more data centers are being built and upgraded. Each of these requires new security devices to keep these physical assets safe.
And this is where Fortinet really shines. Total revenue increased 34% in the first quarter of 2022 to $955 million, a continuation of more than a decade of rapid growth in double-digit sales as a public company. More than a third of sales were product-based, which grew 54% over the previous year. Free cash flow was $274 million, which is a very good profit margin of 29%.
Besides its hardware, Fortinet also has a lot of software-based security offerings. The segment, classified as “service revenue,” grew 24% in the first quarter and is expected to accelerate later in 2022. Fortinet has a proven track record of investing in consistent, profitable growth, and now trades for just 34 times its free cash flow for a period of time. 12 months. As of this writing. It’s my favorite cyber security stock to buy right now.