Don’t let your eyes fool you: It’s been an ugly year on Wall Street. By the first half of 2022, the will be broadly supported S&P500 achieved the worst return in 52 years!
But things have proven even more challenging for the technology-driven Nasdaq Composite and Nasdaq100. The latter comprises the 100 largest non-financial stocks by market capitalization listed on the Nasdaq stock exchange. Both indices have lost around a third of their value since their highs.
But when there’s fear on Wall Street, there’s also opportunity. The Nasdaq 100 is currently home to a number of everyday bargains. What follows are three Nasdaq 100 stocks you can confidently buy right now in October.
The first Nasdaq 100 stock to be bought by opportunistic investors in October is none other than FAANG stock Amazon (AMZN -0.54%).
With Amazon generating the majority of its sales on its leading online marketplace, a sluggish U.S. economy and historically high inflation are seen as noticeable headwinds that could hurt this core segment. But what investors may be missing is where Amazon will generate the lion’s share of its future cash flow and earnings.
Yes, Amazon’s online marketplace is a giant. According to eMarketer, Amazon is on track to generate nearly 40% of all online retail sales in the US by 2022. Even adding up the next 14 closest competitors, it would still be more than 8 percentage points behind Amazon’s dominant market share in online retail sales.
However, selling goods online is a relatively low-margin business. The true value of Amazon’s marketplace lies in the attention it brings to the company’s higher-margin operating channels.
For example, Amazon has built its online retail success on attracting well over 200 million people worldwide to Prime membership. That number of over 200 million is as of April 2021, and Amazon likely added tens of millions more Prime members thanks to its exclusive deal Thursday night soccer. In exchange for Prime members getting shipping perks and access to exclusive content, Amazon generates a $35 billion annual run rate in high-margin subscription sales.
Amazon is also making waves with its world-leading cloud infrastructure service. Amazon Web Services (AWS) accounted for nearly a third of cloud services spending in the second quarter, which is notable given that cloud infrastructure growth is still in its infancy. Although AWS contributes about one-sixth of Amazon’s net sales, it regularly generates well over half of the company’s operating income.
In other words, Amazon’s retail segment isn’t nearly as important as growth from the company’s higher-margin businesses. Even with the growing prospect of a U.S. recession, Amazon’s cash flow needle continues to point higher. That’s what makes it such a pointless buy right now.
The second Nasdaq 100 stock to be a surefire buy for October is an identity-verification-focused cybersecurity specialist octa (OCTA -2.49%). Since hitting a record high in early 2021, Okta’s shares are down 81%. The culprit? Look no further than the company’s bottom line.
When bear markets emerge, Wall Street becomes less tolerant of companies with prime valuations that lose money. In Okta’s case, Auth0’s challenging post-acquisition integration and persistently high stock-based compensation weighed on the company’s bottom line, pushing recurring profitability up at least a year longer than Wall Street had anticipated.
Obviously, losses are nothing to celebrate. In many ways, however, Okta appears to be well-positioned to thrive over the long term.
On a macro basis, cybersecurity has become a staple. No matter how bad the US economy or stock market is doing, robots and hackers don’t take the time to try and steal important data. This provides a secure demand base for virtually all cybersecurity stocks, including Okta.
On a more enterprise-specific basis, Okta’s advantage lies in its artificial intelligence (AI), cloud-native platform. Because the platform was built in the cloud and relies on machine learning to more intelligently detect potential threats over time, Okta’s solutions should prove more effective at stopping hacking attempts than on-premises security services.
Arguably the most intriguing thing about Okta, however, is the aforementioned Auth0 buyout. While there have been integration issues, the obvious benefit of acquiring Auth0 is that it gives Okta access to international markets. Even with economic uncertainty, Okta should be able to sustain annual revenue growth of 20% (or more), thanks in part to this acquisition.
Patient investors looking for steady long-term growth opportunities should consider Okta for their portfolios.
The third Nasdaq 100 stock to confidently fist-buy in October is the tech giant Microsoft (MSFT -0.97%).
While there are clear headwinds for Amazon and Okta, there’s nothing negative in Microsoft’s operating results to suggest trouble. The 32% that Microsoft stock has fallen since hitting a record high late last year looks like quite a discount for a high-margin company that’s consistently delivering.
As I mentioned earlier, the biggest key to Microsoft’s success is getting all of its pieces to work together. For example, the company’s legacy Windows operating system (OS) is nowhere near the growth story it once was. Nonetheless, Windows remains the dominant global desktop operating system and is therefore able to generate significant operating cash flow for the company. Microsoft is able to use the cash generated from its legacy operations for high-growth initiatives and acquisitions.
When it comes to high-growth initiatives, nothing is more important than investing in cloud services. Microsoft Azure, the second-largest cloud service provider behind AWS, has consistently grown revenue by almost 50% year over year in constant currencies. The cloud-driven growth of Azure, Dynamics 365, and Microsoft’s commercial Office segment should help sustain double-digit revenue growth, which is no small feat for a company that’s forecast to generate $221 billion in revenue for fiscal 2023 is.
In addition, acquisitions are expected to play a key role for Microsoft. The company has nearly $105 billion in cash, cash equivalents and short-term investments on its balance sheet and generated $89 billion in operating cash flow last year. As a result, it has the freedom to take risks.
The proposed $68.7 billion cash takeover of the gaming company Activision Blizzard is a perfect example of this. If this deal goes through, Microsoft will continue to cement its place in the gaming arena and establish itself as a potential Metaverse gateway.
Microsoft has an excellent balance sheet and sustained double-digit revenue growth. With a forward price-to-earnings ratio of less than 20, the company is a steal.