The Nasdaq-100 index includes some of the largest technology companies in the world. In most years, it outperforms the benchmark S&P 500 because of the high-growth nature of the tech sector. In down years like 2022, it tends to decline more steeply than the broader market.
The Nasdaq-100 has been down by more than 33% this year, and it's still down roughly 28% year to date -- firmly in bear market territory. While some individual tech stocks suffered even harsher declines, there are a select few that fared significantly better -- and there's reason to believe they can continue to outperform in 2023.
Here are two of those stocks, and why they're worth buying now.
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1. Palo Alto Networks is crushing the Nasdaq-100 in 2022
The combination of high inflation and rising interest rates constrained consumers' spending power, so many companies that rely on people's retail consumption are seeing sales slowdowns. That's why it's a good idea to focus right now on companies that serve other businesses instead, particularly in a sector like cybersecurity. Investment bank Morgan Stanley surveyed leading chief information officers, and they indicated that cybersecurity projects were the category of IT expense they would be least likely to cut, even if a recession hits.
Palo Alto Networks (PANW 0.11%) is a leader in the cybersecurity industry across 13 different categories derived from its three core business units: cloud security, network security, and security operations. The widespread adoption of cloud computing means more companies are shifting their operations (and their valuable data assets) online, which calls for advanced protection. Their attack surfaces (i.e., all the places hackers could target them) are larger than ever, and threats can come from anywhere in the world.
In the first quarter of its fiscal 2023 (which ended Sept. 30), Palo Alto's remaining performance obligations (RPOs) soared by 38% year over year to a record $8.3 billion. That was even faster growth than the company delivered during the prior-year period when the economy was roaring. RPOs are a crucial metric of future performance because those obligations can be expected to convert into revenue over time.
As might be expected, Palo Alto is extremely popular among large organizations that need the most advanced cybersecurity tools. It has 1,262 customers spending $1 million or more annually on its products and services, and that number consistently increased quarter after quarter.
Palo Alto Networks stock is down just 4% year to date, outperforming the Nasdaq-100 by a whopping 24 percentage points. Next year could bring more of the same: According to The Wall Street Journal, of the 41 analysts following the stock, not a single one recommends selling it, and 80% of them gave it their highest-possible buy rating.
2. Volatility in financial markets is boosting Interactive Brokers' stock
What type of company is great to own when the broader stock market is incredibly volatile? Stock brokerages, of course. Interactive Brokers (IBKR 0.83%) is the largest online broker in the world, and since it earns commission-based revenue, it does really well when its clients are trading more actively.
Plus, volatility tends to draw attention to the market, which can attract new investors, especially since many financial assets are now cheaper than they've been in years. As a result, Interactive Brokers saw a 29% year-over-year jump in its customer base in October to over 2 million active accounts.
The company's client equity (or assets under custody) fell by 22% to $296 billion, partly because of a decline in the value of its customers' holdings.
Still, despite falling equity values, in the third quarter, Interactive grew its revenue by an amazing 70% thanks to the influx of new clients and a substantial increase in its net interest margin. Since the company sometimes lends money to its customers to buy financial assets, it's benefiting from the rapid rise in interest rates this year.
Interactive's surge in revenue didn't come in conjunction with a massive increase in costs. The brokerage is simply benefiting from the broader market conditions. As a result, much of that extra cash flowed through to the bottom line in the third quarter, leading to a whopping 125% increase in the company's earnings per share.
Thanks to the company's stellar results recently, Interactive Brokers stock is down less than 1% for the year, outperforming the Nasdaq-100 by over 27 percentage points. The stock market is likely to do better in 2023, but it probably won't reach new highs in a straight line because it'll take time for the economy to climb out of the rut it's currently in.
That means there could be more volatility ahead, which bodes well for Interactive Brokers.
