Investor concerns have not yet subsided, with worries given a further boost last week when Fed Chairman Jerome Powell said bluntly that the central bank is not done raising interest rates — and that the next few years will hurt. On the one hand, this is good news because it clearly signals that the central bank will focus on fighting the high inflation that is weighing on the economy, but it also dramatically increases the risk that the Fed’s actions will trigger a recession.
The immediate result was a sudden drop in stocks everywhere, but the unintended consequence could be new opportunities for investors. As markets pull back, it may just be time for investors to start bottom hunting.
So, let’s look at some stocks that are languishing in a depression. Using TipRanks platform, we’ve pulled the details of three stocks that are down more than 50% so far this year — but also still boast a strong Buy rating from Street analysts — and upside potential starting at 80% or more good. Let’s take a closer look.
We’ll start with RingCentral, a technology firm with a focus on communications as a service. RingCentral offers software packages designed to solve the communication problems common in today’s office environment. The company’s software products allow phone lines, video calls, screen sharing, call forwarding and other telecommunications functions to be routed through the office computer system. The system is also compatible with popular applications such as Google Docs, Salesforce and Outlook and can be accessed via desktop computers, tablets and smartphones.
As one might imagine, RingCentral has done well during the lockdown periods of the COVID crisis. Cloud-based office software saw a general surge at the time, and the exuberance pushed these stocks higher. Since then, as businesses have reopened physical locations, these services have declined in importance; they are still useful and still in demand, but investors have moved away from them as the office environment has normalized.
That helps explain why RNG shares are down 77% so far this year, even as the company’s revenue and profits continue to grow. In its latest quarterly report for 2Q22, revenue rose 28% year over year to $487 million. On the earnings side, non-GAAP diluted EPS rose from 32 cents to 45 cents, a 40% year-over-year increase.
These impressive results were driven by a strong increase in subscriptions, which were up 32% year-over-year to a new total of $463 million. The company’s annual output monthly recurring subscription equivalent annual recurring revenue (ARR) grew 31% to $2 billion.
What it comes down to is a stock that investors should pay more attention to – according to MKM Partners analyst Katharine Trebnik.
“We believe RingCentral offers investors high visibility, multi-year stable revenue growth in a large, underpenetrated market with a solid competitive position, and a robust multimodal communications platform with a value proposition tailored to capture growth from hybrid work-to-business transformation across the board.” While RingCentral has multiple growth vectors, we believe that expanding its solution with Microsoft Teams will be significant. We believe RingCentral is one of the best-positioned companies to capture this growth with its compelling go-to-market strategy backed by its strong track record in channel execution,” said Trebnik.
According to Trebnick, this warrants a Buy rating, and her $80 price target indicates her confidence in one-year upside potential of 87%. (To watch Trebnick’s record, Press here)
Like many leading tech firms, RingCentral has attracted a lot of street attention and has 18 analyst reviews on record. These include 14 buys over 4 holds, for a strong consensus buy rating. The stock has an average target price of $80.56, suggesting a ~88% one-year upside from the current share price of $42.79. (Check out the RNG stock forecast at TipRanks)
Let’s stick to business software and take a look at Zuora. This company creates software systems that enable businesses to better launch and manage their subscription services. From customer tracking to automating invoicing, collections and bidding, to sorting subscription data metrics, Zuora streamlines workloads so enterprise customers can focus on their core missions. Zuora’s partnerships include big names like Mastercard, PayPal and IBM.
Over the past two years, Zuora’s revenue has seen slow, steady gains. The company recently released results for the second quarter of fiscal 2023 – the quarter ending July 31 – and showed a 14% increase in revenue over the previous year, which reached $98.8 million.
However, the company is making a net loss and burning cash. Ultimately, Zuora reported a non-GAAP EPS loss of 3 cents per share. That wasn’t as deep as the 5-cent loss forecast and was an improvement from the 4-cent loss reported in the year-ago quarter. The company’s EPS losses have fluctuated over the past two years, ranging between 1 and 4 cents per share.
On cash burn, Zuora reported $4.8 million in net cash used in operations in fiscal 2Q13, compared to $2.6 million in the year-ago quarter. Free cash flow was deeply negative, at $7.6 million; this compares weakly to $4.4 million of negative FCF in fiscal F2Q22. At the same time, the company still has plenty of cash on hand, with $448.6 million in liquid assets as of July 31 of this year.
Shares in ZUO have fallen sharply in recent months, and shares are down 58% year-to-date. Still, the stock is attracting positive attention from Wall Street analysts, who see the low price as an attractive entry point.
It is among the bulls Joseph Waffy5-star analyst at Canaccord Genuity, who notes that Zuora has taken a strategic initiative that began 18 months ago to improve performance — and that it’s paying dividends for the company.
“The company is seeing success with large enterprises and closed seven deals with an ACV (annual contract value) of more than $500K, up from six in Q1. We also see continued momentum with SI partners, who influenced over 70% of business transactions in Q2. In addition, deals closed by SI partners in the second quarter were twice as large as last year. Finally, the company experienced its lowest withdrawal rate since going public in 2018, reflecting a more resilient customer base,” Vafi commented.
In this top analyst’s opinion, this stock is worth a Buy rating, and his $20 price target suggests a solid upside of 155% over a one-year horizon. (To watch Vafi’s record, Press here)
So that’s Canaccord’s take, what does the rest of the street think about ZUO’s prospects? All on board as it happens. The stock has a consensus rating of Strong Buy, based on a consensus of 3 Buys. ZUO is trading at $7.83 and its average target of $17 suggests a 117% upside from that level. (Check out the ZUO stock forecast at TipRanks)
SiTime Corporation (SITM)
Last is SiTime, an interesting company in the world of high technology. SiTime provides a set of highly specific, completely vital services – development and production of MEMS synchronization products for electronic systems. Embedded in silicon chips, these devices include clocks, oscillators, and resonators; SiTime offers products that consume lower power and maintain high performance and availability. The company’s products are essential for maintaining stable signals and connections in network systems.
On Aug. 3, SiTime reported its 2Q22 results — and shares fell 35%, a decline that accounted for much of the current 62% year-to-date loss. The drop in stock value came as the company cut its guidance for 2H22, cutting its growth forecasts from 50% to 35%. Management cited large customer inventories in the cut, noting that it would slow future sales.
For the most recent quarter, SiTime reported adjusted earnings of $1.11 per share, beating estimates of $1.01 by a margin of 10%. Total revenue for the quarter reached $79.4 million, up 78% year-over-year. The company’s recent history of such strong earnings tended to put the spotlight on the guidance cut.
Raymond James analyst Melissa Fairbanks takes all this into account when it writes: “While the challenges of weakening consumer spending were expected, the speed and scale of the impact on SITM has been somewhat surprising – just three months ago the company raised its full-year revenue growth target to ‘the -some 50% year-on-year’, but has now moved back to the original target of 35%, which is an indication of how quickly search signals have changed. The good news is that the underlying demand signals in key verticals – cloud, EV, high-performance IoT – are still strong over the long term, and sharp weakness in lower-end products serves to accelerate the shift to higher value solutions for precise timing, ensuring a natural increase in margin over time.”
“On net,” the analyst summed up, “while our valuations are down in the near term, we believe the fundamental case remains unchanged, with SITM poised to capture the majority of the precision timing market on the back of strong TAM growth.”
These comments come along with an Outperform rating (i.e. Buy) and a $240 price target, suggesting a powerful 117% upside potential for the stock over the next 12 months. (To see Fairbanks’ record, Press here)
Overall, all 4 of the recent analyst reviews for this stock are positive, giving SiTime a consensus rating of Strong Buy. Shares are trading at $110.75, and the average price target of $216.25 suggests ~95% upside potential for the next year. (See the SITM stock forecast at TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.