As autumn arrives, it’s time for investors to harvest the opportunities in beaten-down technology stocks. After a dismal year, many tech companies now trade at deep discounts despite improving economic conditions. Thus, investing in these stocks ahead of the crowd sets you up for a bumper crop of returns.
While high inflation and rising rates have squeezed the tech sector in 2022, the environment has become more favorable. Inflationary pressures have eased, and the Federal Reserve has paused once more this year. With the election season ahead, lawmakers are unlikely to rock the economic boat further.
At the same time, the job market remains resilient, and consumer spending continues to grow, though at a more moderate pace. Corporate earnings across the tech sector also held up reasonably well, despite companies tightening their belts. The worst of the recent economic turmoil seems to be in the past.
However, many tech stocks remain mired in pessimism, with valuations implying a dire recession. This disconnect suggests massive upside potential once the clouds over the economy dissipate. Technological innovation will resume driving growth as macro conditions stabilize.
Savvy investors should take advantage of this mispricing by staking out positions in depressed tech stocks ahead of the turnaround. The initial signs of economic thawing are there. Once market sentiment follows, these three beaten-down tech stocks offer some of the greatest rebound potential.
Endava (DAVA)
Endava (NYSE:DAVA) is a U.K.-based IT services company catering to clients across industries like payments, financial services, TMT, mobility, and healthcare. It specializes in agile software development, intelligent automation, cloud infrastructure, and digital transformation.
After peaking above $170 in late 2021, DAVA stock plunged over 70% to $45 in August the tech rout. Since then, it has recovered close to 20% but remains over 70% off its highs. This battered-down stock offers compelling value after its unjustified drubbing.
In fact, its Q3 results beat analyst estimates on both revenue and earnings per share. Revenue grew 22.4% year-over-year, and the company’s earnings per share of 73 cents beat estimates by 7 cents. Analysts expect Endava to deliver stellar growth in fiscal 2023. Consensus estimates point to 19% revenue growth and 50% earnings per share growth for the next fiscal year. The company’s leadership sees signs of improving sales pipeline conversion and expects to return to robust growth by Q4 2023.
Endava operates a highly cash generative business model, with adjusted free cash flow margins exceeding 10%, enabling investments for expansion. The company has strengthened global delivery capabilities, establishing a presence in high-potential regions like Asia-Pacific and the Middle East.
Trading at 28-times forward earnings, DAVA stock may look slightly expensive currently. However, this premium is justified given its dominant position in agile software development and ability to capture digital transformation tailwinds. As macro uncertainty fades, Endava’s growth engine will regain momentum, deserving a higher valuation multiple. The recent decline offers a compelling opportunity for long-term investors to grab this growth stock at a bargain.
Okta (OKTA)
As a leading independent identity platform, Okta’s (NASDAQ:OKTA) customer identity and access management solutions make it easier for companies to securely connect people to technology. Its stock has been hammered down over 70% from all-time highs as part of the indiscriminate tech sell-off. However, Okta is poised for a massive turnaround as it shores up execution.
While high inflation and rising interest rates have hurt Okta’s new customer additions, the company has focused on mining its installed base. It is cross-selling new products like Identity Governance and Privileged Access Management to expand its footprint within customers. Okta’s dollar-based net retention rate remains strong at 115%, reflecting this traction.
The company is also streamlining operations and enhancing sales productivity to drive profitable growth. These efforts drove forecast-beating Q2 results, with revenue growth of 23% and earnings per share of 31 cents, which beat estimates by 10 cents. Looking ahead, Okta’s growth story remains intact with the $80 billion identity management space in early innings. Accordingly, analysts forecast revenue to grow at a 20%+ compounded annual growth rate (CAGR) through 2033, reaching $5 billion.
Okta currently trades at 70-times forward sales, well below historical multiples. While this seems expensive, its projected earnings per share growth justifies a higher multiple. If Okta meets analyst estimates, it will trade at a forward price-earnings ratio of just 10-times in 2028. However, given its history of big earnings beats, growth will likely significantly outperform projections.
Despite near-term headwinds, Okta’s long-term upside potential remains explosive. The unjustified plunge offers a compelling bargain opportunity for investors with some patience.
Sangoma Technologies (SANG)
Canada-based Sangoma Technologies (NASDAQ:SANG) provides cloud-based communications solutions for businesses, service providers, and telecom operators. Its stock has declined nearly 40% over the past year, but appears significantly oversold at current levels.
In its latest quarter, Sangoma delivered revenue growth of 18% driven by strong services momentum. It continues gaining share across cloud telephony, contact center software, and telephony hardware.
While Sangoma is currently unprofitable due to its high M&A activity and investments, it is on track to deliver over 12% sales growth in fiscal 2023. Analysts also expect it to turn profitable by 2025 on the back of operating leverage.
Despite the near-term bottom-line pressure, Sangoma has built an asset-light recurring revenue model. Over 70% of its revenue comes from profitable recurring services. This high-margin mix provides stability through business cycles.
Sangoma is also positioning itself as a consolidator in the fragmented communications software space. It has acquired nine companies over the past three years to expand its portfolio and global footprint. While acquisitions have inflated its short-term costs, they offer significant cross-selling opportunities and long-term synergies.
Trading at just 0.54-times forward sales, Sangoma’s valuation implies dire expectations. Once investors recognize the value in its recurring revenue base, profitable growth path, and consolidation strategy, Sangoma deserves to re-rate significantly higher. This presents a compelling opportunity for upside.
On the date of publication, Omor Ibne Ehsan 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.
