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Tech stocks delivered a huge rally in the first half of 2023, and the Nasdaq Composite ($NASX) rose 32% for its best start to the year in four decades. The tech-heavy index has continued to rally in July, and has now recouped most of its 2022 losses.
Valuation multiples of most tech companies have expanded amid the rally, so the phrase “undervalued tech stocks” might sound like a contradiction in terms. However, I believe Amazon (AMZN), Alibaba (BABA), and PayPal (PYPL) are three tech stocks that look relatively undervalued at these price levels, and are good buys for investors looking to add exposure to the tech sector.
Amazon: A Bargain Growth Stock
While Amazon stock has risen over 57% so far in 2023, it is still considerably below its 2021 highs. The stock lost around half of its market cap in 2022, and underperformed the markets in the process. But AMZN's underperformance actually began in 2021 - it gained a mere 2.4% that year, while the S&P 500 Index ($SPX) rallied almost 27%.
High inflation and overinvestment in capacity have taken a toll on Amazon’s profits and cash flows. Its operating income fell over 50% year-over-year to $12.9 billion in 2022, while free cash flows were negative in both 2021 and 2022.
In fact, Amazon’s overall growth has sagged to the slowest pace since the company went public over two decades ago, as revenues rose only 9% last year. The enterprise-focused Amazon Web Services (AWS), a key driver behind Amazon's profitability in recent years, booked its own all-time low in revenue growth, and operating income from the AWS division has also fallen short of analysts' expectations.
That said, I believe that at current levels, Amazon looks like a good stock to buy. Earnings are expected to rebound sharply from current levels, with Wall Street analysts projecting increases of 118% and 50% for net income in fiscal years 2023 and 2024, respectively.
Falling inflation, cost-cutting efforts, and higher capacity utilization should help propel Amazon’s earnings in the coming quarters. Its valuation also looks reasonable, given the stock trades at a forward price-to-sales multiple of 2.36x - below its five-year average of nearly 3x.
Amazon is a play on multiple high-growth and secular themes like e-commerce, cloud, streaming, digital advertising, and artificial intelligence (AI), and I believe it is among the best tech stocks to buy in August.
Alibaba: The Cheap China Stock to Buy Now
If Amazon’s underperformance began in 2021, then Alibaba’s stretches all the way back to late 2020, when China’s well-publicized tech crackdown - and the subsequent scrapping of the Ant Financial IPO - first took a toll on BABA's share price.
Last year, BABA even fell below its 2014 IPO price amid rampant investor pessimism toward Chinese stocks.
While the stock has recovered from its lows, BABA is still outperforming many of its tech peers in 2023, and I believe it looks undervalued at current levels for multiple reasons.
First, the macro environment in China has improved. Not only has the country vowed to support its private companies, but reports suggest that it is also looking at more stimulus to revive its economy.
Alibaba’s business reorganization and the recent focus on cloud and AI could also be positive catalysts in the near future. An eventual listing of Ant Financial would also help Alibaba unlock value.
Finally, while the valuations of many tech stocks are running above historical averages, Alibaba trades at a forward price-to-sales multiple of 1.93x, which is a steep discount to the five-year average of 4.46x.
I believe at these levels, BABA is a rare undervalued tech stock to buy.
PayPal: Buy This Fintech Stock on Sale
Fintech giant PayPal looks like another undervalued tech stock to buy in August. It was among the worst S&P 500 losers in 2022, and is trading almost flat for this year, despite the monstrous tech sector rally.
The price underperformance coincides with some fundamental challenges for PayPal. The company faces rising competition from rivals like ApplePay, margin compression has been a pain point, and its earnings plunged in 2022.
But with a forward price/earnings ratio of 18.6x, PayPal stock looks like a tempting buy at these levels. Valuation multiples are not too far removed from all-time lows, even as PayPal's earnings are expected to rise 24.2% and 20.3% in fiscal years 2023 and 2024, respectively.
Analysts are bullish on PayPal’s stock, and most rate it a Strong Buy:
Even more compelling, its mean target price of $98.21 is a premium of over 32% from current levels, while the Street-high target price of $160 implies the stock more than doubling from here. In other words, analysts believe there's plenty more upside in store for PayPal stock.
Recently, Mizuho suggested that investors buy the dip in PayPal stock. Similarly, I believe at these price levels, PYPL offers a reasonable margin of safety for investors, and is a tech stock worth buying.
On the date of publication, Mohit Oberoi had a position in: BABA , PYPL , AMZN , QQQ , SPY , ARKK . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
