Excitement for artificial intelligence (AI) has driven a remarkable 2023 rally in technology stocks. Big tech, illustrated by the Nasdaq-100, is up a staggering 31% since January, outpacing the broader Nasdaq index at 25%.
The momentum continued with enthusiasm in May. Top performers like Datadog (DDOG -0.53%), Marvell Technology (MRVL -2.99%), and Zscaler (ZS -0.35%) rose as much as 53% last month.
Is this the start of things to come, or has bullish sentiment morphed into irrational hysteria? I'll break down each stock's recent rally to let you know what's what.
Third place: Datadog
May gains: 45%
Datadog is a software-as-a-service (SaaS) company that sells monitoring and security tools for cloud applications. In other words, it collects data from a company's apps, databases, and servers, and monitors it for problems, opportunities for improvement, and security concerns. It's like an assistant that helps IT professionals keep a company's technology running as smoothly as possible.
The company started May's massive rally with a first-quarter earnings report that pleased Wall Street. Datadog exceeded analysts' expectations in year-over-year revenue and earnings-per-share (EPS) growth and increased its guidance for 2023. Perhaps the best news is that Datadog has grown to the point that earnings growth will accelerate as revenue outpaces costs.
Analysts believe the company could grow earnings by an average of 40% annually over the next three to five years. The stock trades at a PEG ratio of 2.2 today, which isn't cheap, but it's not absurdly expensive when considering Datadog's strong profit margins that turn $0.24 of every sales dollar into cash flow.
Verdict: Despite the stock's impressive run, shares still aren't valued at nosebleed levels like in 2020 and 2021. The stock could easily cool off after so much excitement, so consider dollar-cost averaging to build a long-term position slowly.
Second place: Marvell Technology
May gains: 46%
Marvell Technology is a semiconductor company that designs chips for computing, networking, security, and storage applications. Given the digital transformation across the global economy, these products are essential, and management proclaims that Marvell possesses the most diverse offering of data infrastructure products. But this isn't why the stock blew its top last month. For that, we look to the upstart growth of AI.
Management discussed the opportunities in artificial intelligence in its Q1 earnings call for its fiscal year 2024. CEO Matt Murphy believes the company's AI-related revenue could exceed $800 million by 2025, roughly quadrupling last year's figures. That's bound to juice Marvell's growth over the coming years, which helps explain the dramatic uptick in shares.
But is the stock getting ahead of itself? Marvell has done almost $6 billion in revenue over the past year, so even $800 in eventual AI-related sales means that Marvell's AI exposure is still a minority portion of the business. Analysts believe the company can earn $3 per share in its fiscal year 2026, which still values the stock at a future P/E of 19.
Verdict: AI upside seems more hopeful than certain at this point. Meanwhile, the stock is expensive after its giant May leap. Investors should consider selling to lock in profits or skip Marvell until the company posts more concrete growth.
First place: Zscaler
May gains: 53%
Cybersecurity remains a hot topic on Wall Street. Companies can't afford to relax on protecting their data and customers because the costs of a breach are so high. According to IBM, the average breach can cost a U.S. company more than $9 million. Zscaler is a cloud security company that protects from malicious actors on the internet. It routes activity through its platform to ensure it's safe before it reaches its customers' devices.
The stock's recent success story is similar to Datadog's. Shares had declined by 76% from their former high as the tech stock bear market pummeled shares throughout much of 2022 and early 2023. But investor sentiment flipped positive when Zscaler pre-announced earnings in early May and revealed solid results.
Security should remain in high demand as the economy continues moving further into the digital world. Analysts are optimistic about Zscaler's growth prospects, especially its earnings growth, as revenue grows faster than expenses. The company could grow EPS by an average of 63% annually over the next three to five years.
Verdict: Zscaler's stock now trades with a PEG ratio of just 1.5, which seems attractive for a company that's hitting its stride financially. Investors should consider adding slowly, though, as any stock that rises 50% in a month can surely suffer setbacks.
