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2 High-Growth Tech Stocks to Buy the Dips

Tech stocks outperformed in 2020. With expectations of faster economic growth, many expect the sector to lag in 2021. However, Taylor Dart gives two tech stocks that he believes will continue outperforming.

It's been an incredible start to the year for the Nasdaq Composite (COMPQ), with the index adding to its 40% return in 2020, up nearly 3% year-to-date. This is although we've seen a Blue Wave which has put the prospect of higher corporate taxes on the table, and the fact that valuations are at their highest levels since 1999. Given this landscape, it's very difficult to find much value out there in the sector, and many names have enjoyed parabolic runs, up over 100% the last six months. Fortunately, two names remain both reasonably valued given their growth profiles, and these two names are DraftKings (DKNG) and DocuSign (DOCU). Let's take a closer look at both companies below:

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(Source: TC2000.com)

While DraftKings and DocuSign have little in common fundamentally, both names share one key trait: they have an exciting product/service with a significant tailwind in terms of demand, and they've also got incredible sales growth. This combination puts both names at the top of watchlists for growth stock investors and also increases their probability of outperforming, given that names with 40% plus annual sales growth tend to outperform the general market. Let's take a closer look at both names below:

While I wouldn't quite call DOCU a household name yet, it is the leading name in the E-Signature space, and the company has seen a flood of demand with COVID-19. Even though many consumers have been forced to stay home and businesses have migrated from the office in many cases, this has not stopped business globally from being conducted. DocuSign's E-Signature product makes transactions in all industries possible without face to face contact, which is the only safe way to conduct business these days. The company's growth to date has been incredible, with revenue up 77% year-over-year internationally and total revenue up 53% year-over-year to $283 million in the most recent quarter.

Meanwhile, the company's customer base has increased to 822,000 customers globally, a staggering 46% increase year-over-year. While some critics point out that the company's best days are behind it with vaccines beginning to roll out, I would argue the opposite. This is because the product is very sticky and saves businesses tens of thousands of dollars per year in travel and time by simply using E-Signature. This doesn't mean that face to face meetings are suddenly going to stop just because of COVID-19, but any time businesses can be more efficient and save money, they're going to go that route.

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(Source: YCharts.com, Author's Chart)

As shown above, the robust sales growth has translated into significant annual earnings per share [EPS] growth for DOCU, with annual EPS up 340% year-over-year from $0.09 to $0.31. Looking ahead to FY2021 estimates, annual EPS is expected to grow by nearly triple-digits to $0.58, despite lapping a year of almost 350% growth. This is unheard of for a large-cap software company, and DOCU currently boasts one of the most attractive sales/earnings growth rate combos in the market. However, despite the massive quarter the company just report, the stock has actually gone sideways, making minimal progress since its August peak. This provides an opportunity for investors if the weakness continues because it's allowed the valuation to cool off from Q3 levels.

Graphical user interface, chart, histogram Description automatically generated

(Source: TC2000.com)

As shown above, this is the second base that DOCU has built since its primary IPO base breakout in late 2019, and generally, third-stage bases provide a solid entry, especially if they're 20 weeks or longer. Currently, DOCU's base is going on 20 weeks, and we've seen solid accumulation in the lower end of this base near the $200.00 area. While I would not be inclined to chase the stock above $250.00, given that the market remains quite extended, I would view any pullbacks below $210.00 to be low-risk buying opportunities. This would allow the base to extend to closer to 30 weeks hopefully, and drop the company's price to sales ratio closer to 28, from closer to 35 currently. Obviously, there's no guarantee we get a pullback this deep, but this would bake in some margin of safety for investors.

A screenshot of a computer Description automatically generated with medium confidence

(Source: YCharts.com, Author's Chart)

Moving over to DraftKings, the company is pre-earnings, and this typically leads to more volatility. However, like DOCU, DKNG is arguably the leader in the online sports betting space, at a time when we are seeing several states legalize both sports betting and online sports betting at a rapid pace. The biggest development recently is New York, a massive market, with Governor Andrew Cuomo noting that he might be warming up to the possibility of online sports betting to increase state revenue. With several other markets like Michigan set to come online and more than half of states in the U.S. that could still approve online sports betting, the tailwind here is massive for the industry leader DKNG.

 

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(Source: YCharts.com, Author's Chart)

Despite a mostly sidelined year for sports due to COVID-19, DKNG reported massive revenue growth in its most recent quarter, with quarterly revenue up 98% year-over-year to $132.8 million driven by the SBTech merger, and massive growth in its userbase, with 1.02 million users (those making a direct real-money) sports as of the end of Q3. This translated to 64% growth year-over-year, and I would expect this number to grow even further given that several new states should be added in FY2021 for online sports betting.

Just recently, Tennessee already went online in Q4, which is DKNG's 10th state, and Virginia and Michigan should both be running by Superbowl Sunday. In a year where most consumers are missing sports and are anxious to do something to distract from the continued restrictions from COVID-19, this has the potential to be a massive year for DKNG. As shown above, Q4 2020 revenue is expected to continue its robust growth with estimates for $225.6 million in revenue, and Q4 2021 is expected to come in at above $290 million in revenue. These are incredible growth rates that make DKNG a top-50 growth stock in the market currently.

Chart, line chart, histogram Description automatically generated

(Source: TC2000.com)

As shown above, the stock looks to be building a new cup base in the $35.00 - $60.00 range, and the stock could break out of this range in anticipation of demand leading into Superbowl Sunday. While the stock is not cheap here at over 20x sales, this price to sales ratio is actually quite reasonable for a company set to grow annual revenue by over 40% year-over-year at the low-end of estimates. Buying the stock here in the upper end of the range might lead to some draw-downs, but I believe any dips below $46.00 would provide low-risk buying opportunities. This would allow the stock to build a larger base and launchpad for heading to new highs. Like DOCU, there's no guarantee we get a pullback this deep, but at $55.00, I see the stock as just a Hold with a bullish long-term picture and robust growth offset by the stock remaining neutral on valuation.

The market continues to remain extended with near-unprecedented call-buying, so I would not rule out a steep correction in Q1 for the Nasdaq. However, if we do see market weakness for those looking to make a shopping list, I believe DKNG and DOCU are two names to keep a close eye, and I would consider buying them on dips. For now, I do not have positions in either name, but may look to start a position in the coming weeks. As noted above, both stocks' low-risk areas are $210.00 on DOCU and $46.00 on DKNG.

Disclosure: I/we have no positions in any stocks mentioned

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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DKNG shares were trading at $54.95 per share on Thursday afternoon, up $0.32 (+0.59%). Year-to-date, DKNG has gained 18.02%, versus a 1.80% rise in the benchmark S&P 500 index during the same period.



About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles.

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