When people say a stock looks cheap, it can mean a few different things. Today I’ll show you three examples of what people mean by “cheap stocks” in the tech sector, with one quality in common: These stocks are affordable in a good way, and they should be on your shortlist for further research if you’re in a stock-buying mood.
Block: Modest valuation for a growth stock
Let’s start with Block (NYSE: SQ)a well-known provider of financial services with a modern twist.
The stock has a market cap of $40.7 billion and trades at high multiples, including 51 times trailing earnings and 75 times free cash flow. But those multiples don’t tell the whole story, because Block is also a high-octane growth stock.
The company has grown its revenue at a compound annual growth rate (CAGR) of 51% over the past five years. Its underlying earnings are up 91% from last year. Your average analyst expects this earnings jump to be followed by a CAGR of 28% over the next five years. Credit card processors like Visa (NYSE: V) or MasterCard (NYSE: MA) can’t keep up with any of these growth rates. Even digital payment services can PayPal (NASDAQ: PYPL) looks slow in comparison.
And when you choose valuation metrics that factor expected growth into the equation, Block stock suddenly looks incredibly affordable. Shares are trading at 15 times forward earnings estimates. And its price-to-earnings-to-growth (PEG) ratio is a modest 0.81 — lower than PayPal’s 0.85 and much lower than Mastercard’s 1.9 or Visa’s 2.3. A value near 1.0 suggests a reasonable valuation, and lower scores make the stock more affordable.
In other words, Block’s rapid business growth has left many investors and analysts speechless. Block stock gives you access to innovative payment services and business tools, with a touch of cryptocurrency expertise, as the company Bitcoin (CRYPTO: BTC) Worth $470 million at current prices. The stock may seem expensive by traditional valuation metrics, but it’s cheap when you factor in Block’s massive business growth.
Roku: Down Significantly From Previous Highs
Then there is Roku (NASDAQ: ROKU)a veteran in the field of media streaming technology and services.
This stock doesn’t make this list because of its low valuation multiple. Roku is currently losing money in terms of net income and pretax operating income. Free cash flow is back in the black after dipping into red ink territory in 2022 and 2023, but Roku stock isn’t a bargain compared to cash earnings either.
So how did it end up on my cheap tech stocks list? Look, this stock is down 44% since last November and down 87% from its all-time highs in July 2021. A price correction would probably have been appropriate after the previous peak, but this plunge is too far.
Roku is a leading name in a fast-growing industry with a global business opportunity. It’s a large market with plenty of room for expansion. More than 40% of potential users subscribe to streaming services in mature markets like North America and Western Europe, according to Statista. Developing countries like Indonesia and India haven’t even cracked the 10% mark. In other words, most of the world is still getting used to online streaming services, and Roku is benefiting from the growing adoption of these services.
Meanwhile, Roku’s stock is priced for absolute disaster. Yes, the earnings are modest at best and negative in many cases, but the company is doing better over time. The upward trend should continue as Roku’s global footprint grows and the digital advertising industry recovers from a few years of inflation-fueled malaise. In a few years, it should make sense to talk about Roku’s earnings again.
I mean, do these healthy financial lines belong on the same chart as Roku’s crashing stock price? I don’t think so:
So Roku may not be cheap by most senses of that phrase, but I see it as a deeply misunderstood growth story that deserves a richer valuation. It could be years before it reaches the lofty heights of 2021 again, and that’s OK. Roku stock is a direct bet on the long-term future of media streaming services, and you don’t even have to pick a winning content platform.
SoundHound AI: A Rock-Solid Financial Foundation
Finally, you should consider a voice control specialist SoundHound AI (NASDAQ: ZOE)With unique, capable voice interpretation technology and a growing list of high-profile clients, I look forward to another long-term growth story that doesn’t get the market valuation it deserves.
Like Roku, SoundHound AI is currently operating at a loss. It too, like Roku, is delivering stellar revenue growth. Its underlying sales have nearly tripled in two years. And it’s easy to miss just how robust SoundHound AI’s financials are.
The backlog of order bookings and future sales in subscription contracts currently stands at $723 million, up 113% from the same period last year. That’s a lot of guaranteed revenue for a company that currently reports about $55 million in annual sales. And the balance of the backlog continues to balloon as the company adds more customers with long-term contracts.
Additionally, SoundHound AI’s balance sheet is virtually debt-free, with a cash reserve of a whopping $200 million.
I understand if you’d run away after one look at SoundHound AI’s negative earnings and rising price-to-sales ratio. But that might be a mistake. The stock is modestly priced considering its large (and growing) backlog, not to mention that rock-solid balance sheet. This little company is poised for long-term success.
Should You Invest $1,000 in Block Now?
Before you buy shares in Block, you should consider the following:
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Anders Bylund has positions in Bitcoin, Roku, and SoundHound AI. The Motley Fool has positions in and recommends Bitcoin, Block, Mastercard, PayPal, Roku, and Visa. The Motley Fool recommends the following options: long Jan 2025 $370 calls on Mastercard, short Jan 2025 $380 calls on Mastercard, and short Sep 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.
3 Cheap Tech Stocks to Buy Now was originally published by The Motley Fool
