You may not like what I’m about to say, but the tech-heavy Nasdaq Composite (NASDAQINDEX:^IXIC) might be on the verge of a crash.
After more than doubling from its coronavirus pandemic bear market low, the Nasdaq moved back into correction territory last week (a decline of at least 10% from a recent high). Though corrections a perfectly normal part of the investing cycle and, as some would consider, the price of admission to world’s greatest wealth creator on the planet, the orderly fall of the Nasdaq might soon become disorderly.
The high-growth Nasdaq may be about to tumble
For instance, the Nasdaq 100 — a measure of the 100 largest non-financial stocks listed on the Nasdaq exchange — ended 2020 with a cyclically adjusted price-to-earnings (CAPE) ratio of more than 55. That more than doubles the Nasdaq 100’s CAPE ratio from two years earlier. Even with a host of reasons backing premium valuations in growth stocks, valuation ratios are extended well past historic norms.
Uncertainty is also continuing, with regard to the coronavirus pandemic. Despite the U.S. leading the most successful vaccination campaign of all developed nations, it’s still quite possible that variants of the disease could spread and minimize the effectiveness of vaccines, which were geared to protect against the original strain of the virus.
Even leverage is a genuine concern. Retail investors (especially millennials) have been piling into the market for much of the past year. According to a September 2020 Harris poll, 43% of retail investors are using some form of leverage, such as options or buying stock on margin. It’s not out of the question that margin calls could come into play for inexperienced and/or highly levered retail investors if the market gets moving in the wrong direction.
The point is this: A Nasdaq stock market crash is very much a possibility.
If the Nasdaq crashes, these stocks become must-adds
But if a Nasdaq crash happens, cheering, not jeering, is the proper response. That’s because every crash and correction in history has proved to be an opportunity to buy great companies at a discount. If a Nasdaq crash does arise, my plan is to add the following three growth stocks to my portfolio.
If panic-selling were to take shape, it would be the perfect reason to wade into a sizable position of content delivery and security solutions provider Fastly (NYSE:FSLY).
As is the case with a lot of high-growth companies, the coronavirus pandemic took existing trends and accelerated them in a big way. With more businesses moving online and seemingly more consumers than ever buying online and consuming digital content, demand for Fastly’s edge cloud services have been robust. Since we’re talking about a usage-based operating model, it’s easy to see how a company like Fastly can grow at a double-digit pace for a long time to come.
Perhaps the best thing about Fastly in 2020 was its ability to overcome what would otherwise have seemed like awful news. During the third quarter, TikTok parent ByteDance pulled most of its traffic off of Fastly’s network. TikTok was responsible for an eighth of Fastly’s revenue through the first half of the year, but was embroiled in a stateside spat with the Trump administration at the time.
Despite modestly ramping down sales expectations in the third quarter, Fastly still delivered a dollar-based net retention rate (DBNER) of 147% in Q3 and 143% in Q4. Put another way, these DBNER figures tells us that existing clients spent a respective 47% and 43% more than they did in the year-ago quarters for Q3 2020 and Q4 2020. Fastly is much more than just a one-client wonder.
The Fastly operating model is also generating considerably more impressive margins over time. Last year, adjusted gross margin jumped 430 basis points to 60.9%, and the company retained 99% of its customers.
Wall Street is looking for Fastly to triple its annual sales over the next four years, which should put it on the radar for all growth stock investors.
Another growth stock I’d love to add to my portfolio during a Nasdaq crash is cloud-based customer relationship management (CRM) software provider salesforce.com (NYSE:CRM).
With each passing year, CRM software is becoming more important and engrained in the business world. It’s used by companies to log customer information, handle service issues, management marketing campaigns, and is especially helpful in recommending which clients might be interested in new products or services. It’s data-driven and designed to make businesses winners. That makes CRM a no-brainer for service industries, but also extremely useful for manufacturing, finance, and healthcare businesses.
When it comes to CRM software sales, there’s salesforce and everyone else. Market share estimates from IDC for the first half of 2020 showed that salesforce controlled nearly 20% of the global CRM market. This compares to No.’s 2 through 5, which didn’t even equal salesforce’s share on a combined basis. This is a consistent double-digit growth trend, and salesforce is miles ahead of its competition.
What’s more, salesforce has an intriguing new growth avenue, assuming its $27.7 billion cash-and-stock deal to buy Slack Technologies (NYSE:WORK) closes. Slack’s highly popular enterprise communications platform will allow salesforce to cross-sell its products to a myriad of small and medium-sized businesses. This acquisition will likely help the company sustain a sales growth rate of around 20% annually.
Salesforce is also very reasonably priced. Whereas most cloud stocks are valued north of 20 times sales, salesforce can be scooped up for less than 8 times forecast sales in 2021.
A final high-growth stock I’d be champing at the bit to buy if panic-selling pulverized the Nasdaq is Singapore-based Sea Limited (NYSE:SE). Sea is not a cheap company by any means, but a healthy discount from its all-time high could be just what the doctor ordered.
Sea has three rapidly growing operating segments. The one generating the juiciest earnings before interest, taxes, depreciation, and amortization (EBITDA), for now, is its gaming arena. Sea finished the year with over 610 million quarterly active gaming users (up 72%), 73 million of which were paying customers. What’s noteworthy here is that the percentage of paying customers rose from 9.4% in Q4 2019 to 12% of total users in Q4 2020. It’s certainly possible the pandemic aided these figures, but it’s equally as likely that its games are resonating with and entertaining users.
The far more exciting aspect of Sea is its e-commerce platform known as Shopee. Even though Shopee has global ambitions, it’s predominantly focused on emerging market regions, such as Southeastern Asia. Last year, gross merchandise value on the platform doubled to $35.4 billion, with gross orders totaling 2.8 billion (up 133%). With the middle class still establishing itself in Southeastern Asia, a high double-digit growth rate looks sustainable for Shopee.
Finally, Sea offers a rapidly growing financial services segment that handled $7.8 billion in payment volume last year and had over 23 million paying mobile wallet users. With the company focusing on emerging markets, some of which are underbanked, a digital wallet could be a game-changer.
Sea is the type of business that could conceivably quadruple its sales by 2024 or 2025. With so much going right for the company, any panic-selling on the Nasdaq should be a green light to buy Sea.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.