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With U.S. stock markets rising by double digits in 2023, and the S&P 500 Index ($SPX) trading near its all-time highs, it might seem tough to find cheap and undervalued names – especially in the tech sector, which served as the torchbearer of the 2023 rally.
Furthermore, at least a section of the market believes that stock valuations are getting a bit stretched after the stellar rally in 2023 - which, to be honest, not many analysts had predicted. However, a combination of the U.S. economy’s resilience, the continued fall in inflation, and the Fed’s dovish signals helped bulls get the upper hand over bears in 2023, after having lost out the previous year.
I believe PayPal Holdings (PYPL) and Alibaba Group (BABA) are two undervalued and cheap stocks that could rebound in 2024. Both of these stocks have underperformed for three consecutive years now, and Alibaba stock trades only marginally higher than its 2014 IPO price. Here’s why both of these stocks look like good buys for 2024.
PayPal Had Yet Another Disappointing Year
PayPal stock closed in the red for 2023, making it the third straight year that the fintech giant delivered negative returns. To be sure, there are reasons to be pessimistic about PayPal. The company’s revenue growth has sagged, while its margins have compressed amid rising competition – including from ApplePay. The company’s active user count has also fallen, even as the transactions per account has risen.
PayPal faces multiple headwinds, including the slowdown in e-commerce sales. However, with a next 12-month (NTM) price-to-earnings (PE) multiple of 11.6x, I believe PayPal looks quite cheap and undervalued, and seems due for a rebound in 2024.
The company is focusing on profitable growth in the future, and has also scaled up its share repurchases. During the Q3 2023 earnings call, PayPal noted that the company has repurchased 7% of its outstanding shares over the last eight quarters. All else being equal, aggressive buybacks should help PayPal increase its per-share earnings.
PayPal Stock 2024 Forecast
Analysts rate PayPal stock as a “Moderate Buy,” with 17 of the 36 analysts in coverage rating it as a “Strong Buy.” One analyst has rated PYPL as a “Moderate Buy,” while the remaining 18 rate it as a “Hold.” The stock’s mean target price of $74.57 is around 21.5% above current price levels.
I believe markets haven’t yet rewarded PayPal for its buy-now-pay-later (BNPL) business, even as pure-play BNPL name Affirm (AFRM) has delivered multibagger returns in 2023. Overall, I find PayPal stock a cheap and undervalued stock to buy, even as the broader markets are trading near their all-time highs.
Alibaba Stock Looks Quite Cheap at These Price Levels
It's tough talking about undervalued stocks without a mention of Chinese tech giant Alibaba. The e-commerce giant’s shares have not created any investor wealth since its listing, and it faces various challenges, both on the macro and company-specific level.
To begin with, Alibaba might appear to be a “value trap,” as the stock has traded at a single-digit NTM PE multiple since September 2022 – with the current multiple hovering just above 8x. It's almost impossible to find a quality U.S. tech stock trading at such depressed multiples.
However, thanks to China’s recent pivot to a more controlled economy and the continued crackdown on tech companies (as exemplified by the most recent gaming regulations), the valuations of Chinese stocks have taken a beating for the good. And on the macro level, Alibaba continues to face intense competition from the likes of PDD Holdings (PDD), which not only owns Pinduoduo but also Temu, the hugely popular shopping app.
Alibaba has restructured its business into six units, and is looking to list these to create shareholder value. These efforts, however, took a beating when the company last month called off the IPO of its Cloud business. There have been frequent top management changes at the company, which hasn’t helped restore much confidence either.
Is Alibaba Stock a Buy for 2024?
Alibaba is spending billions of dollars in share buybacks, and repurchased $1.7 billion worth of its shares in the September quarter – leaving another $14.6 billion in its current buyback plan. It also initiated a dividend, and while many tech investors see a dividend initiation as a sign that the company is short on future growth opportunities, I believe it is a step in the right direction.
Alibaba’s slowing growth is no surprise - but at current valuations, it looks quite cheap and undervalued. The stock is long overdue for a rerating, and progress on business reorganization - coupled with the eventual listing of Ant Financial - could be the drivers that eventually take BABA stock higher.
Wall Street analysts are also quite bullish on BABA, and it has a consensus rating of “Strong Buy” from the 14 analysts covering the stock.
Notably, BABA stock trades below its Street-low target price of $90, while the Street-high target of $150 is nearly double the current price.
Chinese stocks look due for a comeback in 2024, making China-focused ETFs a good bet for 2024. Within the Chinese tech space, I find Alibaba to be one cheap stock that looks like a buy, especially for patient investors looking for an undervalued turnaround candidate.
On the date of publication, Mohit Oberoi had a position in: BABA , PYPL , AFRM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
