Technical Selling: Two growth stocks to buy and one to sell

After an astonishing rise from the low point of the epidemic in March 2020, which saw the focus on technology Nasdaq 100 More than doubled, it has since seen a partial reversal and is now officially in bear market territory.

Bear markets are generally defined by an extended decline in an index (or a trading sector) of at least 20% from recent rallies. The Nasdaq 100 has comfortably crossed that with a current loss of 26% from its all-time high in November 2021. Standard & Poor’s 500 Not far behind, it lost 16% over about the same period.

Additional interest rate increases, combined with global geopolitical tensions and a slowing economy, suggest that investors will need to be more selective in their stock choices compared to the past two years. With that in mind, here are two growth stocks worth buying right now and one to avoid.

Image source: Getty Images.

First stock to buy: Nvidia

When it comes to choosing quality stocks, picking companies that focus on the very long term is a great place to start. nvidia (NVDA -2.72%) is a global leader in the design and production of advanced computer chips (semiconductors), which are set to remain in high demand thanks to rapid advances in new technologies such as self-driving vehicles, robotics and virtual reality.

To prepare for this high-tech future, Nvidia is transitioning from a dominant hardware operator to a computing platform company that also manufactures semiconductors. What does it mean? Well, Nvidia’s future may depend on the capabilities of its software. In the gaming sector, for example, the GeForce Now platform allows more than 14 million users to access their favorite games in the cloud, eliminating the need for installation and updates.

The best example of this is Nvidia’s self-driving technology, which is set to hit the road in 2024 Mercedes-Benz cars, closely followed by cars from Tata MotorsJaguar and Land Rover. The sector has already generated $8 billion in sales for Nvidia, but that hardly scratches the surface of what could be a $2.1 trillion annual opportunity by 2030.

Such segments may be small contributors to Nvidia’s revenue at the moment, but they may dominate the company’s finances beyond the next decade. In the shorter term, analysts expect Nvidia to generate $34.7 billion in revenue and $5.65 in earnings per share during 2022, representing growth of 29% and 27% over 2021, respectively.

Two people standing in a data center with a laptop computer, analyzing a digital screen.

Image source: Getty Images.

The second stock to buy: DigitalOcean

Cloud computing is one of the most influential technologies of the modern era. It allows companies to migrate their operations to the digital realm, unleashing the ability of employees to collaborate on tasks even if they are in a different building or country. Digital Ocean Holdings (DOCN -2.45%) is a cloud services company focused exclusively on small and medium-sized businesses with fewer than 500 employees, competing with its multi-trillion dollar competitors.

The company has tailored its services to suit startups and small businesses that may not have tech-savvy employees on their payroll. It offers an easy-to-use control panel, allowing one-click deployment of virtual machines. But more importantly, it crushes its competitors in terms of price, with bandwidth starting at $0.01 per GB per month, which is 80% cheaper than its nearest competitor.

Whether companies manage databases, create applications, or develop software, DigitalOcean has plans that range from $0 to $15 per month, which is an incredibly affordable starting point. It has attracted 623,000 customers as of the first quarter of 2022, of whom 102,400 are spending more than $50 per month. This quarter, DigitalOcean reported the highest average revenue per user, and retention rate, indicating that its existing customers are expanding their use of the company’s services.

Analysts expect the company to generate $566 million in revenue through 2022. But that’s a fraction of what DigitalOcean expects and is a $72 billion allocable opportunity this year, which could double to $145 billion by 2025. With the company’s inventory declining by 76% of the total – high time, now might be a good time to take a long-term position.

A person rides a Peloton exercise bike in his bedroom.

Image source: Peloton.

Stock to sell: Peloton

Once a pandemic darling, Interactive Peloton‘s (PTON 0.55%) The popularity of home fitness equipment and digital classes has plummeted now that the community has mostly reopened. The company finds itself competing with gyms again, and seeing both participation and revenue decline, resulting in staggering net losses. A new CEO is taking the lead and he’s making some positive changes, but the smart move is to wait for tangible progress before taking over.

Peloton announced its financial results for the third quarter of fiscal year 2022 (ended March 31), revealing a significant 24% year-over-year decline in revenue, which included a 42% decline in product revenue. Average monthly workouts among Peloton subscribers decreased by 28%, which is significant because it is an important measure of how well users engage with the company’s products.

But perhaps the biggest concern is the collapse in Peloton’s gross profit margin. It came in just 19.1% in the quarter, down from 35.2% in the prior quarter last year, and it drove gross profit down 59%. The result: a quarterly net loss of $757 million, bringing the company’s net loss to nearly $1.2 billion in just the past six months.

The situation was so dire that Peloton decided that its $879 million cash balance was not enough to secure the company’s future. It only took $750 million in debt financing to help smooth out any deficit, but that creates other problems—another expense (interest) is one of them.

Peloton stock is down more than 90% from its all-time high, significantly underperforming the market. The way back from here is full of uncertainties, so it is best to avoid it until the company’s outlook is more stable.

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