After 2021 turned out to be a stellar year for the US stock market, it’s not an easy job trying to pick winners for 2022. Indeed, many analysts believe top technology stocks are vulnerable to a strong correction after a powerful rally over the past year as they have become too expensive.
Making the task of picking the coming year's winners even more challenging: the global economy continues to face challenges posed by the surging Omicron variant and the risk of higher interest rates which generally diminish the appeal of high-growth stocks.
That said, there are still many technology stocks with muscular growth potential which, according to analysts’ consensus estimates, remain undervalued and could see a powerful rebound in the next 12 months.
In the wake of Wednesday's tech sector selloff on Wall Street, some tech shares will likely provide more attractive entry points for savvy dip buyers.
Below, we've identified two such stocks from different segments, both of which we believe have huge growth potential:
1. Shopify (TSX:SHOP)
Canadian e-commerce platform provider Shopify (NYSE:SHOP) has been a great winning bet during the pandemic. The Ottawa-based company offers tools primarily aimed at small businesses, enabling them to engage in commerce across multiple channels.
Since its creation 15 years ago, Shopify has sold software that allows about 2 million merchants worldwide to run websites by paying a subscription fee, ranging from $30 to $2,000 a month.
In addition, the company offers sellers more than a dozen services for running an online store—everything from the actual e-commerce website to inventory management to payment processing. The global healthcare crisis has boosted the company’s sales which jumped 86% in 2020 from 2019. Over the recent November Black Friday / Cyber Monday weekend, Shopify merchants brought in $6.3 billion in sales, a 23% rise from a year earlier.
Now Canada’s most valuable company, it accounted for 8.6% of US e-commerce sales in 2020, well behind Amazon's (NASDAQ:AMZN) 39% but ahead of Walmart (NYSE:WMT) and eBay (NASDAQ:EBAY), according to EMarketer.
Shopify stock, which closed on Wednesday at $1,190, is now down about 32% from its November record high. But that dip could be a buying opportunity for long-term investors.
Chart: Investing.com
In an Investing.com survey of 41 analysts, 23 rated the stock as “outperform,” with an average 12-month price target of $1,679.14, implying a 41% upside for shares.
Evercore ISI analysts, while upgrading Shopify to outperform last month, said in a note:
“We are upgrading SHOP to outperform with a $1,770 price target based on four [analysts'] key opinions: 1) The stock is dislocated; 2) This is a high quality fundamentals asset; 3) This is a high quality asset in terms of growth opportunities and option value.”
2. Pinterest
San Francisco-based Pinterest (NYSE:PINS) is another tech stock offering an attractive buying opportunity after some weakness.
Shares of the digital scrapbooking and search company have been enduring a persistent downward trend since mid-last-year amid concerns that user growth will continue to slow as people resume their outside activities after a year of lockdowns. The stock closed on Wednesday at $32.84. It fell more than 47% in 2021 and has endured additional losses during the first week of 2022 trading.
Pinterest originally benefited from global lockdowns driven by the COVID-19 pandemic as people stayed home and were looking for things to do around the house, such as decorating, gardening, and cooking. The platform, which provides images and ideas for all sorts of activities and projects was an ideal resource for a stay-at-home environment.
But the slowdown in user growth has likely run its course and PINS now looks cheap.
Chart: Investing.com
According to an Investing.com poll of 31 analysts, the stock could jump more than 68% from its current level in the next 12 months.
Piper Sandler this week upgraded PINS to overweight from neutral, saying in a note to clients that concerns about user growth appear to be overblown. Piper Sandler lowered its price target on Pinterest to $53 per share from $58. That's still 61% above where the stock closed on Wednesday.
Its note said:
“While PINS did lose users sequentially [from its second quarter to the third quarter], comps should ease in ’22. Also, [monthly active users] are not created equal: comments suggest headwinds were driven mostly by non-mobile users, which contribute less to revenue. Mobile users on the other hand generate a ‘significant majority’ of revenue and have grown 2Q/3Q.”
“Shares now look oversold, trading in the mid-30s from a peak of high 80s. At current prices, PINS is trading at [less than six times] ’23 [enterprise value]/Sales versus an average FY2 EV/Sales closer to 10x since 2019.”