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Buy 5 Nasdaq Composite Laggards of 1H Set to Rebound in 2H
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The Nasdaq Composite is firing on all cylinders after an astonishing rally in 2023. Last year, the tech-heavy index soared 43.4%, recording its best year since 2020. Year to date, the Nasdaq Composite is up 21% compared with a gain of 15.6% for the S&P 500 and 3.8% for the Dow. On Jun 20, the index recorded an all-time high of 17,936.79. Currently it is trading at 17,858.68.
Explosion of Generative AI
The tech rally in 2023 was led by a massive thrust toward AI, especially generative AI. Some financial and technology experts believe that AI is much-hyped and may lead to a bubble. We believe that the AI-space is yet to unfold in the U.S. and international markets. Once that happens, it will generate huge business opportunities for technology companies to produce high-end products.
Moreover, the robust fundamentals of the U.S. economy reduce concerns of a near-term recession. Additionally, the blockbuster earnings in the last reported quarter of NVIDIA Corp. (NVDA) — the largest global manufacturer of generative AI chipsets — raised expectations of investors that the market for AI will show strong growth in the coming decade.
Per market.us, the worldwide AI market was worth $177 billion in 2023 and is anticipated to reach a staggering $2.75 trillion by 2032. PricewaterhouseCoopers International Ltd. estimated that AI could contribute up to $15.7 trillion to the global economy in 2030. Of this, $6.6 trillion is likely to come from increased productivity and $9.1 trillion should come from consumption-side effects.
Smart Devices Aiding Computing Demand
Smart devices need computing and learning capabilities to perform face detection, image recognition and video analytics capabilities. These require high processing power, speed and memory. They also need low power consumption, and better graphic processors and solutions, which bode well for the semiconductor industry.
Positive Catalyst
In the June post-FOMC meeting statement, the Fed indicated one cut of 25 basis points in the benchmark interest rate in 2024. The central bank expects a full 1% rate cut in 2025. However, recently released several weak key economic data raised market participants’ expectations.
The CME FedWatch tool currently shows a 62.3% probability that the Fed will reduce interest rates by 25 basis points in September. Moreover, the interest rate derivative tool also shows a 93% chance of two rate cuts of 25 basis points by the end of this year.
A Few Nasdaq Composite Laggers
Despite a dream run of the tech-laden index, a few large-cap stocks have significantly underperformed year to date. A handful of those stocks currently carry a favorable Zacks Rank. These stocks are likely to regain momentum in the second half of 2024 as a steadily dwindling inflation rate coupled with a low interest rate regime are expected to help in reviving their businesses.
Our Top Picks
We have narrowed our search to five Nasdaq Composite listed laggards of year to date with strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Datadog Inc. (DDOG - Free Report) has been benefiting from strength in customer demand for offerings in modern observability, cloud security, software delivery and cloud service management. DDOG had 3,340 customers with an annual run rate of $100K or more at the end of the last reported quarter.
DDOG’s dollar-based retention rate was in the mid-110s in the first quarter as customers increased their usage and adopted more products. Contributions from a solid cloud partner base, including Google Cloud, Microsoft Azure and Amazon Web Services, remain a key growth driver of DDOG besides an expanding portfolio.
Zacks Rank #1 Datadog has an expected revenue and earnings growth rate of 22.1% and 16.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.5% over the last 60 days.
Zscaler Inc. (ZS - Free Report) is benefiting from the rising demand for cyber-security solutions due to the slew of data breaches. The increasing demand for privileged access security on digital transformation and cloud-migration strategies is a key growth driver for ZS.
A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards ZS from the negative impacts of the ongoing macroeconomic headwinds. AS’ portfolio expansion through acquisitions with the likes of Avalor, Canonic Security and ShiftRight is praiseworthy.
Zacks Rank #1 Zscaler has an expected revenue and earnings growth rate of 32.4% and 67%, respectively, for the current year (ending July 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last seven days.
Bentley Systems Inc. (BSY - Free Report) provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. BSY offers open modeling and open simulation applications for infrastructure design integration.
BSY’s offerings include MicroStation, OpenRoads, OpenRail, OpenPlant, OpenBuildings, OpenBridge, OpenSite, OpenFlows, STAAD and RAM, SACS, MOSES, AutoPIPE, SITEOPS, CUBE, DYNAMEQ, EMME, and LEGION, and geoprofessional applications for modeling and simulation of near and deep subsurface conditions.
Zacks Rank #2 Bentley Systems has expected revenue and earnings growth rates of 11.1% and 16.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5% over the last 60 days.
Check Point Software Technologies Ltd. (CHKP - Free Report) is benefiting from the adoption of cloud solutions, aided by strong demand for its advanced solutions, primarily CloudGuard, Harmony, Sandblast Zero-day threat prevention and Infinity solutions. Increased demands for network security gateways to support higher capacities are aiding the adoption of CHKP’s remote access VPN solutions.
Acquisitions have helped CHKP broaden its portfolio and enter into newer markets, which have eventually driven its revenues. Several Infinity deals in various industries, including government, telecommunication and industrial, were positives in the reported quarter.
Zacks Rank #2 Check Point Software Technologies has expected revenue and earnings growth rates of 6% and 7.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 60 days.
Okta Inc. (OKTA - Free Report) provides identity management platforms for enterprises, small and medium-sized businesses, universities, non-profits, and government agencies in the United States and internationally.
OKTA’s products consist of Okta Information Technology Products and Okta for Developers. Okta IT Products include Single Sign-On, Mobility Management, Adaptive Multi-Factor Authentication, Lifecycle Management and Universal Directory. Okta for Developers includes Complete Authentication, User Management, Application Programming Interface Access Management and Developer Tools.
Zacks Rank #2 Okta has an expected revenue and earnings growth rate of 11.9% and 50.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 5.7% over the last 30 days.
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Buy 5 Nasdaq Composite Laggards of 1H Set to Rebound in 2H
The Nasdaq Composite is firing on all cylinders after an astonishing rally in 2023. Last year, the tech-heavy index soared 43.4%, recording its best year since 2020. Year to date, the Nasdaq Composite is up 21% compared with a gain of 15.6% for the S&P 500 and 3.8% for the Dow. On Jun 20, the index recorded an all-time high of 17,936.79. Currently it is trading at 17,858.68.
Explosion of Generative AI
The tech rally in 2023 was led by a massive thrust toward AI, especially generative AI. Some financial and technology experts believe that AI is much-hyped and may lead to a bubble. We believe that the AI-space is yet to unfold in the U.S. and international markets. Once that happens, it will generate huge business opportunities for technology companies to produce high-end products.
Moreover, the robust fundamentals of the U.S. economy reduce concerns of a near-term recession. Additionally, the blockbuster earnings in the last reported quarter of NVIDIA Corp. (NVDA) — the largest global manufacturer of generative AI chipsets — raised expectations of investors that the market for AI will show strong growth in the coming decade.
Per market.us, the worldwide AI market was worth $177 billion in 2023 and is anticipated to reach a staggering $2.75 trillion by 2032. PricewaterhouseCoopers International Ltd. estimated that AI could contribute up to $15.7 trillion to the global economy in 2030. Of this, $6.6 trillion is likely to come from increased productivity and $9.1 trillion should come from consumption-side effects.
Smart Devices Aiding Computing Demand
Smart devices need computing and learning capabilities to perform face detection, image recognition and video analytics capabilities. These require high processing power, speed and memory. They also need low power consumption, and better graphic processors and solutions, which bode well for the semiconductor industry.
Positive Catalyst
In the June post-FOMC meeting statement, the Fed indicated one cut of 25 basis points in the benchmark interest rate in 2024. The central bank expects a full 1% rate cut in 2025. However, recently released several weak key economic data raised market participants’ expectations.
The CME FedWatch tool currently shows a 62.3% probability that the Fed will reduce interest rates by 25 basis points in September. Moreover, the interest rate derivative tool also shows a 93% chance of two rate cuts of 25 basis points by the end of this year.
A Few Nasdaq Composite Laggers
Despite a dream run of the tech-laden index, a few large-cap stocks have significantly underperformed year to date. A handful of those stocks currently carry a favorable Zacks Rank. These stocks are likely to regain momentum in the second half of 2024 as a steadily dwindling inflation rate coupled with a low interest rate regime are expected to help in reviving their businesses.
Our Top Picks
We have narrowed our search to five Nasdaq Composite listed laggards of year to date with strong potential for the rest of 2024. These stocks have seen positive earnings estimate revisions in the last 60 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Image Source: Zacks Investment Research
Datadog Inc. (DDOG - Free Report) has been benefiting from strength in customer demand for offerings in modern observability, cloud security, software delivery and cloud service management. DDOG had 3,340 customers with an annual run rate of $100K or more at the end of the last reported quarter.
DDOG’s dollar-based retention rate was in the mid-110s in the first quarter as customers increased their usage and adopted more products. Contributions from a solid cloud partner base, including Google Cloud, Microsoft Azure and Amazon Web Services, remain a key growth driver of DDOG besides an expanding portfolio.
Zacks Rank #1 Datadog has an expected revenue and earnings growth rate of 22.1% and 16.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 8.5% over the last 60 days.
Zscaler Inc. (ZS - Free Report) is benefiting from the rising demand for cyber-security solutions due to the slew of data breaches. The increasing demand for privileged access security on digital transformation and cloud-migration strategies is a key growth driver for ZS.
A strong presence across verticals, such as banking, insurance, healthcare, public sector, pharmaceuticals, telecommunications services and education, safeguards ZS from the negative impacts of the ongoing macroeconomic headwinds. AS’ portfolio expansion through acquisitions with the likes of Avalor, Canonic Security and ShiftRight is praiseworthy.
Zacks Rank #1 Zscaler has an expected revenue and earnings growth rate of 32.4% and 67%, respectively, for the current year (ending July 2024). The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last seven days.
Bentley Systems Inc. (BSY - Free Report) provides infrastructure engineering software solutions in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. BSY offers open modeling and open simulation applications for infrastructure design integration.
BSY’s offerings include MicroStation, OpenRoads, OpenRail, OpenPlant, OpenBuildings, OpenBridge, OpenSite, OpenFlows, STAAD and RAM, SACS, MOSES, AutoPIPE, SITEOPS, CUBE, DYNAMEQ, EMME, and LEGION, and geoprofessional applications for modeling and simulation of near and deep subsurface conditions.
Zacks Rank #2 Bentley Systems has expected revenue and earnings growth rates of 11.1% and 16.5%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 5% over the last 60 days.
Check Point Software Technologies Ltd. (CHKP - Free Report) is benefiting from the adoption of cloud solutions, aided by strong demand for its advanced solutions, primarily CloudGuard, Harmony, Sandblast Zero-day threat prevention and Infinity solutions. Increased demands for network security gateways to support higher capacities are aiding the adoption of CHKP’s remote access VPN solutions.
Acquisitions have helped CHKP broaden its portfolio and enter into newer markets, which have eventually driven its revenues. Several Infinity deals in various industries, including government, telecommunication and industrial, were positives in the reported quarter.
Zacks Rank #2 Check Point Software Technologies has expected revenue and earnings growth rates of 6% and 7.7%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the last 60 days.
Okta Inc. (OKTA - Free Report) provides identity management platforms for enterprises, small and medium-sized businesses, universities, non-profits, and government agencies in the United States and internationally.
OKTA’s products consist of Okta Information Technology Products and Okta for Developers. Okta IT Products include Single Sign-On, Mobility Management, Adaptive Multi-Factor Authentication, Lifecycle Management and Universal Directory. Okta for Developers includes Complete Authentication, User Management, Application Programming Interface Access Management and Developer Tools.
Zacks Rank #2 Okta has an expected revenue and earnings growth rate of 11.9% and 50.6%, respectively, for the current year (ending January 2025). The Zacks Consensus Estimate for current-year earnings has improved 5.7% over the last 30 days.