The 2022 tech bubble burst has pulled almost every tech stock down 30-80%. The past recessions and bubble bursts show that the market recovers in the long term. However, the world post-recession or bubble burst is not the same for all companies.
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How to spot the tech stocks that will recover
The stock market is witnessing two crises simultaneously in 2022; the tech and crypto bubble bursts and the looming recession. Stocks of some crypto exchanges are on the verge of getting delisted. Many companies are doing stock splits and reverse stock splits to maintain trading volume and stay relevant on the TSX.
In the dot.com bubble burst of 2000, hedge funds poured money into anything tech. Tech companies couldn’t handle such inflated valuations and collapsed after hedge funds exited. Even after 22 years, many stocks are far from their 2000 peaks.
Those who invested in the 2000 bubble booked losses. But those who invested in stocks that showed signs of growth after the bubble burst made significant wealth. The tricky part is identifying stocks that can recover.
Two beaten-down tech stocks to buy now
I have identified two beaten-down tech stocks that have the fundamental strength to survive a recession and the potential to recover in the long term.
- Descartes Systems (TSX:DSG)(NASDAQ:DSGX)
- Dye & Durham (TSX:DND)
Descartes Systems
Trade is a business that never goes out of demand. It always recovers. Trade is sensitive to the economic situation as companies and individuals exchange more goods, services, and information in a growing economy. Descartes facilitates this trade by offering supply chain solutions like e-commerce fulfillment, routing, customs and regulatory compliance.
Descartes is among the stocks hit by the 2000 and 2022 tech stock sell-offs. It is one of the stocks that didn’t return to its 2000 bubble peak until it was in the next bubble of 2021. It is not surprising that the stock’s peak in both tech bubbles was slightly above $91. So does this mean the stock will repeat its 2000 history?
Historical data does not guarantee future returns. Today’s scenario is very different than in 2000. Descartes is a stronger company with a diverse customer base and growing revenue. Its solutions are sticky, and global trade has become more complex than in 2000. The stock fell 37% from its bubble peak but is still trading 57% above its pre-pandemic level. Does this mean it has more downside?
The Russia-Ukraine war disrupted the global supply chain but created an opportunity to rebuild new routes. Descartes is still reporting double-digit revenue growth and profits. The stock could fall in the coming months as recession creeps in, but it will surge as the economy recovers. Keep this on your watch list and buy it when it dips below $60, which could be in August as e-commerce volumes slow.
Dye & Durham
Another beaten-down stock is Dye & Durham, which lost 64% of its value in the 2022 bubble bust. This information management software helps lawyers and finance professionals improve work efficiency. The company’s strategy is to grow through acquisition, as it aims to reach an adjusted EBITDA of $1 billion. One major element of its strategy was the Link acquisition agreed upon in December 2021.
But a lot has changed since then, and the DND-Link acquisition is in the doldrums, pulling DND stock down 12% in July. This stock started trading on the exchange amid the tech bubble in July 2020. So the historical stock price is inflated. Hence the 64% correction has put the stock on track for value growth. The current market is nirvana for acquirers. For instance, Constellation Software stock has surged since it began accelerating its acquisitions pace.
If the Link acquisition goes through, DND’s revenue and EBITDA could grow significantly, but the deal would increase its debt by $3.2 billion as per the original offer. Even before the acquisition, DND has a debt-to-equity ratio of 153x, way above Link’s average ratio of 81x. But DND’s $164 million operating cash flow is sufficient to service the $1.2 billion debt.
If the Link acquisition falls apart, DND can channel its resources to acquire another company at a lower rate. Studies show companies use their IT budget towards digitization when business is weak. DND stock could see both organic and acquisition growth in the long term.
