The words “cheap” and “tech stocks” don’t often go together in the same sentence.
The tech sector is known for being pricey as it’s a high-growth industry, and many stocks, especially in the software sector, aren’t even profitable. However, that doesn’t mean you can’t find value plays in the sectors. You just have to know where to look.
Keep reading to see two stocks that fit the bill today.
A tech giant that can withstand the ad slowdown
Advertising stocks have gotten slammed over the last year as a pullback in demand has hit digital advertising platforms hard. That includes Alphabet (GOOG) (GOOGL), the Google parent whose revenue growth slowed to just 13% in the second quarter in part due to difficult comparisons, as well as uncertainty from advertisers.
Alphabet stock has continued to slide since then, however, even though the company’s status as the leader in internet search is as strong as ever. Though the company will face headwinds like a slowdown in ad demand and a stronger dollar over the rest of the year and perhaps into 2023, those expectations are already baked into the stock price.
Analysts expect Alphabet’s revenue growth to slow to just single digits in the second half of the year, and see earnings per share falling as well. However, advertising demand will eventually come back and the dollar won’t keep strengthening forever. And when the ad market returns to growth, Alphabet’s performance should accelerate on both the top and bottom lines.
That means that investors have a great opportunity to buy shares of the stock right now when it’s trading at a price-to-earnings ratio of 18, or close to 16 when the company’s $125 billion cash hoard is factored in. Alphabet has also been aggressively buying back stock, which will help lift earnings per share over the coming years, and offers another reason to believe the stock is undervalued.
A streaming stock making a comeback
After losing subscribers in the first and second quarters, Netflix (NFLX) was left for dead by investors earlier this year. The stock fell more than 75% from its peak last year at one point, and its market cap shrank to less than $100 billion.
However, Netflix appears to be back on track following its third-quarter earnings report. The company returned to subscriber growth in the third quarter, adding 2.4 million new members against expectations of just 1 million. The company also guided for subscriber growth to accelerate in the fourth quarter, calling for 4.5 million subscriber additions.
In addition to the return to subscriber growth, there are other reasons Netflix stock could keep moving higher. The company is set to launch its advertising business in early November, debuting its basic with ads tier in 12 countries that together make up 75% of the global TV ad market, opening up a $140 billion market opportunity. Management said that the response from advertisers has been extremely positive, and it’s easy to see why.
Netflix is a unique property for advertisers. It has more than 200 million paying subscribers around the world, and it gives advertisers the best of both digital and television advertising. That’s because it offers the targeting of a social media platform with the large-screen video format that advertisers prefer, and has been shown to be a more effective form of advertising than static digital ads.
The streamer is also cracking down on password sharing, offering a new option for “account sharing,” where it will charge users a smaller fee to share accounts with people outside of their household. This should open up an essentially cost-free revenue stream for Netflix.
The company has also said it plans to hold content spending flat at $17 billion for the next few years, which will also help it grow profit margins as it adds new subscribers, raises prices, rolls out advertising, and monetizes password sharing.
At a P/E ratio of 27, Netflix may not be cheap, but it’s a very reasonable price for a company that still has a lot of profit growth ahead of it.
— Jeremy Bowman
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Source: The Motley Fool