2 Technology Stocks to Buy on Dips

It’s been an incredible past few months for the Nasdaq-100 (QQQ) and the tech names in a rally that is one of the strongest in 20 years, nearly mirroring the move we saw off of the 1998 correction lows. Following the 1998 correction, the Nasdaq-100 gained 102% in 92 trading days, and this rally was up 64% in 77 days as of yesterday’s highs…

This relentless advance has produced several massive winners in the index, but it’s also contributed to quite a bit of complacency, which has left the QQQ vulnerable to a correction, and the high-growth names vulnerable as well. However, similar to the correction following the massive rally in 1998, I would expect any significant pullbacks in the high-tech growth names to be buying opportunities. Therefore, it’s worth building a shopping list of the best names, and two names stand out if we do see healthy corrections. Let’s take a closer look below:

The key ingredients to selecting the best growth stocks are superior strength vs. peers and high-octane earnings growth, and when it comes to Docusign (DOCU) and Amazon (AMZN), these companies check both boxes. Docusign is one of the top-performing stocks year-to-date, up over 150% year-to-date, dwarfing the performance of the QQQ.

Meanwhile, Amazon has also handily outperformed the QQQ, up 68% year-to-date, triple the QQQ’s 21% year-to-date return. However, it’s the earnings growth for both companies that is most impressive, with annual EPS expected to double for both DOCU and AMZN between FY-2020 and FY-2022. This translates to a compound annual EPS growth rate of over 40%. Let’s take a closer look below:

(Source: YCharts.com, Author’s Chart)

Beginning with Amazon, we can see that the company has seen a powerful earnings trend since FY-2015, and managed to grow annual EPS by over 1500% in just five years. The retail disruptor’s FY-2019 annual EPS came in at $23.01, up 14% year-over-year, but is expected to dip to $20.35 in FY-2020 due to higher investments and higher pay for workers.

While this might spook off some investors, it’s no reason to write off the stock, as this is merely a very brief aberration within a powerful earnings trend. As the FY-2021 and FY-2022 annual EPS estimates show, Amazon is expected to earn $38.80 and $55.95 in the following two years, more than making up for the brief lapse in earnings growth in FY-2020. Therefore, while the stock might look very expensive at 150x FY-2020 annual EPS estimates, it’s worth noting that all stocks set to double annual EPS in 2 years trade at what seem to be very lofty multiples.

Based on FY-2022 annual EPS of $55.95, Amazon is currently trading a 2-year forward multiple of 54, which is still quite expensive, though not as expensive as some of the other tech high-fliers. However, if we could see a 15% to 20% pullback in Amazon closer to $2,750, I believe this would provide a low-risk buying opportunity.

At these levels, the stock would relieve most of its overbought condition and would be trading at less than 50x FY-2022 annual EPS, a very reasonable valuation for a company set to grow annual EPS by more than 80% next year ($20.35 to $38.80). However, at current levels, I see Amazon as close to fully priced, and therefore, while I continue to hold my core position, I trimmed some shares above $3,100.

(Source: YCharts.com, Author’s Chart)

Moving over to Docusign, the company was posting net losses per share from FY-2016 through FY-2018 as the company was in its growth phase, funneling any profits back into its perfecting product and customer acquisition. Since then, however, the company has seen market-leading growth, with annual EPS growing by 240% last year to $0.31, and earnings estimates are projecting another massive year in FY-2021.

Currently, annual EPS estimates are sitting at $0.51, forecasting 64% growth year-over-year, and this growth is lapping a year of triple-digit growth. This is one of the highest two-year stacked earnings growth rates in the market currently at above 300%, placing the company in a group of just 50 companies out of 7000 with this explosive growth rate.

If we look ahead to FY-2022 annual EPS estimates, annual EPS is forecasted to increase to $0.85, translating to yet another year of incredible growth. Assuming the company meets or beats these estimates, this would translate to a 66% growth year-over-year, maintaining the two-year stacked triple-digit growth rate. Like Amazon, the high earnings multiple might scare investors off, as Docusign is currently trading at 370x FY-2020 earnings estimates.

However, Shopify (SHOP) has been selling for a multiple of near 1000 for years now, and the top-50 growth stocks in the market often trade at very high multiples as investors don’t care about what they’re earning this year, they’re looking out 24-36 months. While Docusign is not expensive here, though, it’s not cheap either, and I would prefer to see a 20% pullback to $165.00 or lower to bake in a margin of safety. If we were to see the stock trade down into the lower-risk $160.00 – $165.00 zone before year-end, I believe this would provide a low-risk buying opportunity.

While most tech names remain over-extended, AMZN and DOCU have two of the strongest earnings growth rates in the market currently, and a product or service that is seeing an accelerated trend in their favor due to COVID-19. While both names have gotten ahead of themselves here as have many tech names, I do not believe their runs are over yet on a long-term basis, and I believe the first sharp correction should provide a buying opportunity.

Therefore, if we were to see a pullback to…

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