2022 was a tough year for nearly all sectors. Tech stocks, however, were among the hardest hit as an interest-rate-driven bear market reared its ugly head.
Of course, tech stocks won’t stay beaten down forever. On the contrary, they are likely to lead the way higher during the next bull market as they have done in the past. But with the market trying to regain its footing, it will pay for investors to be a bit picky in this space this year.
Based on a combination of fundamentals and technicals, here are three tech stocks that look ready for a major breakout.
| NET | Cloudflare | $49.52 |
| ADBE | Adobe | $365.82 |
| NOW | ServiceNow | $463.07 |
Cloudflare (NET)
At the top of my list of tech stocks to buy is cloud services provider Cloudflare (NYSE:NET), which is known for having the fastest network in the world, as well as for its cybersecurity offerings. As the numbers of cyberattacks rise, so too does demand for the company’s products.
According to a 2022 report conducted by global intelligence and cybersecurity consultancy S-RM, three-quarters of companies have experienced a serious cyberattack within the past three years. And the World Economic Forum’s Global Cybersecurity Outlook 2023 says a “catastrophic cyber event” is likely to occur in the next two years.
Cloudflare’s revenue has been growing by about 50% for the past few years. That pace has slowed a bit recently, but Cloudflare is on track to generate $1 billion in annualized revenue. This milestone came on the heels of a solid third quarter for the company, in which revenue was up 47% year over year to $253.9 million. The company still reported a loss of $42.5 million for the quarter, but that was significantly better than the loss of $107.3 million a year ago. While macroeconomic factors may weigh on Cloudflare’s growth temporarily, the potential here is still massive.
“Even as we achieve $1 billion, we have penetrated less than 1% of our identified market for products we already have available today,” said Co-founder and CEO Matthew Prince, who noted the company is targeting $5 billion in organic revenue within five years.
NET stock is down 42% over the past year and sits 78% below its all-time high of around $220, made in November 2021. Shares hit a 52-week low of $37.37 on Nov. 9. Since then, they have gained 32.5%, signaling that the tide may be turning. A move back to the stock’s 52-week high of $132.45 would deliver a return of 167% for investors who buy now.
Adobe (ADBE)
Software company Adobe (NASDAQ:ADBE) got its start back in 1982 and was a key player in the formation of the desktop publishing industry. Today, it is a $167.5 billion diversified software company with a wide range of offerings across digital media, publishing and the cloud.
In December, Adobe reported record revenue and operating income for its fiscal 2022 year, which ended Dec. 2. Revenue was up 12% year over year of $17.6 billion. Operating income rose 5.1% to $6.1 billion.
While growth is expected to moderate a bit going forward, analysts are still forecasting revenue will increase 9.3% in FY 2023 and 11.9% in FY 2024. Earnings per share are expected to increase 11.7% in FY 2023 and 14.3% in FY 2024.
One major growth driver for Adobe is the company’s planned acquisition of collaborative design platform Figma for $20 billion in cash and stock, announced in September. According to Adobe, Figma’s recurring revenue is estimated to have hit $400 million in 2022. The merger is facing scrutiny from the Department of Justice, but Adobe expects it to close later this year.
ADBE stock is down 27% over the past year and 48% from its all-time high just below $700, made in November 2021. Shares hit a 52-week low of $274.73 on Sept. 27. Since then, they have gained more than 33%. If the stock can retake its 52-week high of $540.46, investors stand to make a 48% return. That’s a tall order, but a breakout back above $400 would be a good start.
ServiceNow (NOW)
ServiceNow (NYSE:NOW) is a software service provider that is gaining ground in the IT service management business. The company has a strong user base and an improved cost structure that will pay off in the long run.
Despite the drag of rising interest rates and a faltering economy, ServiceNow has exceeded analysts’ earnings estimates in each of the past four quarters.
In its recently reported fourth-quarter results, the company saw earnings of $2.28 per adjusted share, up 46% year over year. Revenue also came in ahead of Wall Street’s estimates, rising 20% to $1.94 billion. Subscription revenue was up 22% to $1.86 billion, also better than expected, as was management’s subscription revenue forecast of $8.44 billion to $8.5 billion for the full year. Analysts had been calling for just $8.36 billion.
Finally, despite the headwinds facing the tech sector and the broader economy, ServiceNow’s management said it has no plans to cut its workforce this year. Investors should take this as a sign of confidence given all the layoffs currently happening at major tech companies.
NOW stock is down just 6.5% over the past year, outperforming the S&P 500. Moreover, shares have gotten off to a strong start in 2023, rising 19%. And they are up 37% since hitting a 52-week low of $337 on Oct. 13. A return to NOW’s all-time high above $700 a share would mean a gain of more than 50% from the current price. But first, the stock will need to break past $500, which could be in the cards sooner rather than later.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.