2 Tech Stocks to Buy With Incredible Earnings Growth

2 Tech Stocks to Buy With Incredible Earnings Growth

Posted On July 2, 2021 1:07 pm

It’s been an impressive stretch for the Nasdaq-100 (QQQ), with the index up more than 6% for the month of June, pushing the index to a 12% return year-to-date, after already lapping an incredible 47% return last year. While the index is not yet overbought, as shown below, we continue to have high levels of complacency, and the Nasdaq Composite is now nearing overbought levels. This doesn’t mean that the market can’t go higher from here, but it does suggest elevated risk for starting new positions, with the best course of action being to wait for a dip to add exposure to the market. For investors patient to wait for a dip, two names look to be solid buy-the-dip candidates if we do see some weakness this summer. Both names sport double-digit compound annual EPS growth rates and are leaders in their industry with high double-digit sales growth, making them ideal candidates to put at the top of one’s shopping list.

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(Source: TC2000.com)

DocuSign (DOCU) and Atlassian (TEAM) have underperformed the Nasdaq Composite over the past six months, with the Software Sector lagging the Nasdaq Composite after an impressive rally off the March 2020 lows. While this underperformance has been a little disappointing, it’s to be expected, as even the best growth stocks need time to build new bases after a triple-digit performance in less than a year. The good news is that these multi-month consolidations have allowed DOCU and TEAM to grow into their valuations a little, with TEAM now trading at 131x FY2023 annual EPS estimates and DOCU trading at 102x FY2024 annual EPS estimates. These are not cheap valuations by any means, which trades at a deep discount to peers currently. However, for high growth stories with 75% plus margins like this, I would expect further weakness to improve valuations should present a buying opportunity, given how strong these names acted during the recent correction.

Beginning with TEAM, the company has an incredible track record of earnings growth and is one of Gartner’s Magic Quadrant leaders for Enterprise Agile Planning Tools. Since FY2015, the company has posted a compound annual EPS growth rate of 32.7%, making it one of the fastest-growing tech names in the market. In the same period, the company grew gross margins from 83% to 84%, with revenue growing by an average of 37% year-over-year. Despite lapping incredible growth rates, the company reported another quarter of 38% growth just recently, with gross margins hitting a new 1-year high of 84.1%. This translated to TEAM’s strongest quarter of growth in the past two years, and the earnings trend is expected to remain robust, with very bullish estimates ahead in FY2023.

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(Source: YCharts.com, Author’s Chart)

As noted previously, TEAM’s annual compound annual EPS growth rate came in at 32.7% between FY2015 and FY2020, and it’s expected to maintain a 25% compound annual EPS growth rate looking out to FY2023 ($1.96 vs. $0.28). This would make TEAM one of less than 250 large-cap companies with a 25%+ compound annual EPS growth rate, with the stock commanding a triple-digit multiple for this impressive growth rate and industry-leading margin profile. From a revenue multiple standpoint, it’s generally been best to buy the stock at below 25x sales and take profits above 36x sales, where the stock tends to have muted upside. Based on a current market cap of $64BB and $2.36BB in FY2022 revenue, the stock is not cheap, sitting at 27x sales. However, if we could see the stock…

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