U.S. stock markets have been witnessing an impressive rally since the beginning of October. We are not out of the woods as inflation remains elevated. In the post-FOMC meeting statement in November, the Fed Chairman clearly indicated that the terminal interest rate in this rate-hiking cycle will be higher than 5%.

Yet, markets continue to rally on the assumption that the Fed may lower the magnitude of rate hike from the December FOMC meeting. A series of recently released economic data has also suggested that the central bank’s ultra-hawkish monetary policies started giving the needed results albeit a slow pace.

On the other hand, the technology sector has been suffering a bloody blow in 2022 after witnessing a meteoric rise in the last two coronavirus-ridden years. Shares of several technology behemoths have plummeted due to a higher interest rate regime, the soaring yield on U.S. government bonds and a higher valuation of the sector.

The Wall Street rally is likely to continue in the near term as the last two months of any year generally remain favorable for investors. Moreover, the midterm election of the U.S. Congress is scheduled on Nov 8. A split Congress may escalate the ongoing rally.

At this stage, it should be prudent to invest in beaten-down technology stocks with a favorable Zacks Rank that are likely to gain for the rest of 2022. Here are five such stocks —  Airbnb Inc. ABNB, Fortinet Inc. FTNT, Datadog Inc. DDOG, Paycom Software Inc. PAYC and Zscaler Inc. ZS.

Tech is a Long-Term Bullish Sector — Buy on the Dip

A series of breakthroughs in 5G wireless network, cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants and IoT, has given a boost to the overall technology space. Consequently, the sector has vast potential.

The leading emerging markets of Asia, Latin America, Africa and some European countries are still way behind in using digital technology compared to the developed world. While mobile phone penetration is nearly 90% in these countries, a large number of people are still using phones with old features, since voice communication instead of data has served most of their needs. Even those using smartphones, rarely utilize online digital features. 

However, the outbreak of coronavirus quickly changed the lifestyle and lookout of these people. They were not entirely used to the digital platforms for their office work (work from home), ordering food and other daily needs or transferring money and making payments. Moreover, online schooling, video conferencing and virtual networking have now become essential.

Countries that are more digitized were able to minimize their losses during the pandemic. These are major lessons for the other countries. Even those less inclined toward digital technology and online platforms, either because they have to learn using smartphones or tablets or due to fear of data theft, are now realizing the huge advantage of the online platforms.

Our Top Picks

We have narrowed our search to five U.S. technology stocks currently trading at a deep discount to their 52-week highs. These stocks have strong potential for the rest of 2022 and have seen positive earnings estimate revisions in the last 30 days. Each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks in the past three months.

Image Source: Zacks Investment Research

Airbnb is riding on an improvement in the travel industry. Continued recovery in both longer-distance and cross-border travel owing to a reduction in travel restrictions is benefiting ABNB’s Nights & Experience bookings. Additionally, growth in Average Daily Rates and Gross Booking Value is acting as a tailwind.

Growing active listings in Latin America, North America and EMEA are contributing well to the top line. Growing sales and marketing initiatives along with continuous efforts to upgrade various aspects of the Airbnb service are helping the company gain momentum among hosts and guests.

Airbnb has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings improved 4.9% over the last seven days. ABNB is currently trading at a 55.1% discount to its 52-week high.

Fortinet is benefiting from rising demand for security and networking products amid the coronavirus crisis as a huge global workforce is working remotely. FTNT is also benefiting from robust growth in Fortinet Security Fabric, cloud and Software-defined Wide Area Network offerings.

Moreover, continued deal wins, especially those of high value, are solid drivers. Higher IT spending on cybersecurity is expected to aid Fortinet grow faster than the security market. Also, focus on enhancing its unified threat management portfolio through product development and acquisitions is a tailwind for FTNT.

Fortinet has an expected earnings growth rate of 33.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.9% over the last seven days. FTNT is currently trading at a 35.6% discount to its 52-week high.

Zscaler is benefiting from the rising demand for cyber-security solutions owing to the slew of data breaches. Increasing demand for privileged access security on digital transformation and cloud-migration strategies is a key growth driver of ZS.

Zscaler’s portfolio boosts its competitive edge and helps add users. Moreover, a strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, is safeguarding Zscaler from the pandemic’s negative impact. Also, recent acquisitions, like Smokescreen and Trustdome, are expected to enhance ZS’ portfolio.

Zscaler has an expected earnings growth rate of 71% for the current year (for July 2023). The Zacks Consensus Estimate for current-year earnings improved 14.6% over the last 30 days. ZS is currently trading at a 68.8% discount to its 52-week high.

Datadog is benefitting from new customer additions and increased adoption of its cloud-based monitoring and analytics platform driven by accelerated digital transformation and cloud migration across organizations.

Solid adoption of Synthetics and Network Performance Monitoring products are expected to aid customer wins for DDOG in the near term. Contributions from a solid cloud partner base, including Google Cloud, Microsoft Azure and Amazon Web Services, remain the key growth driver for DDOG besides an expanding portfolio.

Datadog has an expected earnings growth rate of 64.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.3% over the last seven days. DDOG is currently trading at a 65.2% discount to its 52-week high.

Paycom is a provider of cloud-based human capital management software as a service solution for integrated software for both employee records and talent management processes.

PAYC’s differentiated employee strategy, measurement capabilities and comprehensive product offerings are helping it win new customers. Further, solutions like Ask Here and Manager on-the-Go, both focusing on employee usage and efficiency, are tailwinds.

Paycom has an expected earnings growth rate of 30.8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 1.9% over the last seven days. PAYC is currently trading at a 42.7% discount to its 52-week high.

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Fortinet, Inc. (FTNT) : Free Stock Analysis Report
 
Paycom Software, Inc. (PAYC) : Free Stock Analysis Report
 
Zscaler, Inc. (ZS) : Free Stock Analysis Report
 
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Airbnb, Inc. (ABNB) : Free Stock Analysis Report
 
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