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Tech Sell-Off: 1 Growth Stock to Buy, and 1 to Sell

Tech Sell-Off: 1 Growth Stock to Buy, and 1 to Sell
Written by publisher team

The stock market got off to a rough start in 2022 with Standard & Poor’s 500 The index is already down 1.9%. But the high-growth technology sector it represents Nasdaq 100 The index has fallen more than twice that amount, losing 4.5% since the start of the year.

Some tech stocks made astronomical gains in 2021, so a pullback is not expected. However, this presents an opportunity for investors to buy at a discount, as might be the case for a digital document creator DocuSign (NASDAQ: DOCU). On the other hand, a sharp loss can be a signal to head for exits and cut your losses – Robinhood Markets (NASDAQ: HOOD) This law fits.

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Why DocuSign is a purchase

DocuSign is known as the pioneer in digital signature technology, but to avoid the pitfalls of a one-dimensional business model, it has expanded into some key segments. The company is leveraging new age technologies such as artificial intelligence to build the next generation of digital tools for businesses.

The pandemic caused DocuSign to boom as companies moved to work-from-home arrangements and required innovative ways to work with some normalcy. The company doubled its customer base from 585,000 in March 2020 to more than 1.1 million as of this writing. But now that employees are slowly back in the office, the company has to prove it can survive.

There is an argument that the hybrid business model is here to stay with some employees who maintain the work-from-home schedule at least in some capacity, and that would be hugely beneficial for DocuSign. But the company does not count on it. For example, its Insight platform can analyze legal contracts using artificial intelligence to identify risks, which is useful for any organization dealing with a large volume of legal paperwork. Lawyers are expensive, so this tool can be a significant cost saver – both at home and in the office.

DocuSign’s stock rose from $75 at the start of 2020 to $315 in 2021, but has since experienced a 57% drop amid a massive sell-off of the technology. This could be an opportunity, because DocuSign is now offering consistent earnings. In fiscal year 2021, it generated $0.90 in non-GAAP earnings per share, but this year, analysts expect net earnings to double to $1.98 per share.

This is why DocuSign is one stock to buy during this tech stock funnel, especially for long-term focused investors.

A person standing and thinking about a decision looks out the window.

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Why Robinhood Selling

After hitting an all-time high of $85 per share in August 2021, Robinhood stock has collapsed, down 81%. The company rose to prominence as the stock trading platform favored by Generation Z, a demographic that most brokers have struggled to attract with its complex user interfaces and commission structures.

Robinhood has introduced a smartphone app that looks almost like a game, and has successfully marketed its commission-free business model to break down barriers that prevent young investors from entering the stock market. But this strategy has come under intense scrutiny from the Securities and Exchange Commission, which has issued several financial penalties to Robinhood over the past few years.

Most notable was a $65 million fine in December 2020, which the company incurred for misleading investors about the true costs of its no-commission model. Robinhood generates revenue from a practice called pay for order flow, and as it turns out, the customer can actually pay more In fees, not less, although they pay zero at face value. Most recently, the regulator pledged to review “liked” features on smartphone brokerage apps, as they are believed to encourage excessive risk-taking.

But to add fuel to the fire, Robinhood played a major pivotal role in cryptocurrency trading last year — an industry that is also under pressure from lawmakers with new rules set to be introduced as soon as 2023. In the third quarter of 2020, Robinhood’s cryptocurrency will form Trading is only 2.5% of the company’s transaction-based revenue, but in the same quarter of 2021, it ballooned to 19.1%. It was up 51.7% in the second quarter.

For a company already under the microscope for its practices, this change in focus could be detrimental in the long run.

Financially speaking, 2021 has been a year of incredible losses for Robinhood. In the nine months ended September 30, it lost $8.85 per share, compared to a loss of just $0.02 per share in the same period last year. It comes amid a massive 313% increase in operating costs as the company ramps up its technology development and marketing.

Simply put, Robinhood is not doing much right at the moment, and it will require a massive effort to fend off regulatory risks to its business. That’s why investors are more likely to sell stocks.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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