Looking for undervalued tech stocks in this paused bull market? Check out two promising ideas you might be missing out on.
You can define a “cheap stock” in many ways, but there’s nothing quite as classic as a growth stock changing hands at a low valuation ratio. With that in mind, I highly recommend taking a closer look at freelance services platform Fiverr (FVRR 2.84%) and memory-chip giant Micron Technology (MU 4.60%) right now. Their stocks look deeply undervalued.
Micron: A cyclical upswing
The tech sector runs in wide, sweeping cycles. A market-boosting upswing almost always makes middle-market suppliers too optimistic about the long-term bull market for their wares that might be forming. In many cases, they wind up left with overstuffed component inventories when high demand fades out quicker than expected. Then everyone gets caught by surprise by the next boom. Demand surges, and the market realizes that the prior bust’s excess supply has all been sold or rendered obsolete, and in the meantime, none of the hardware providers have built any factories since that last cyclical industry downturn started. Then manufacturers have to play catch-up to boost capacity so that they can meet the fresh wave of reignited demand.
That’s life in the memory chip sector, where Micron plies its trade. Right now, the industry faces soaring product demand because every piece of the artificial intelligence (AI) puzzle requires a ton of high-speed memory chips. As it happens, the aftershocks of the coronavirus crisis and flooding disasters in Taiwan left the largest memory makers woefully unprepared to meet this surge in demand.
But the upswing is happening, and I don’t see how it could be stopped. From smartphones and PC systems to data center servers and technology-packed cars, the devices around us are screaming for more memory chips. So Micron is ramping up its in-house manufacturing capacity with a multibillion-dollar construction push in 2025.
Micron’s chip production and top-line sales are trending up after a heavy crunch in 2022 and 2023. Cash profits and net income are following suit. But it’s unprofitable right now, in terms of earnings per share. As a result, Micron stock might look expensive at first glance due to its negative earnings and nonexistent price-to-earnings (P/E) ratio.
But its bottom line should turn sharply upward over the next couple of years. The stock is trading at just 9 times next year’s estimated earnings and a reasonable 4.5 times sales. Long story short, Micron looks poised to thrive in 2025 and beyond, and the stock deserves a richer forward P/E ratio. It’s a stellar buy at these modest share prices.
Fiverr: Turning a corner on profitability
Many investors wrote Fiverr off as the beneficiary of a short-lived trend a few years ago. Freelancing gigs in digital trades were perfect fits for the excessive amounts of free time people had during the COVID-19 lockdowns. So Fiverr’s stock soared to unsustainable heights amid the social-distancing era, then crashed hard when many of the platform’s users and potential users went back to their workplaces.
The stock has been sliding since early 2021, and is down 92% from its peak. But a funny thing happened on the way to Fiverr’s financial ruin.
The business never stopped growing.
Sure, its after-tax earnings dipped into red-ink territory for a while, and its revenue growth slowed down from the breakneck pace of 2020. But Fiverr kept building its business, step by undaunted step, while pocketing lots of cash profits along the way. Fiverr’s sales have increased by 128% in three years while its free cash flows skyrocketed by 1,400%.
FVRR Revenue (TTM) data by YCharts.
The business is doing just fine, and analysts are starting to catch on. Bottom-line estimates for the next fiscal year are trending upward and Fiverr’s stock price has been struggling to keep up. As a result, the stock trades at just 9.7 times estimated forward earnings and 2.3 times sales today.
This little company has some big ambitions. In the long run, this gig economy leader hopes to disrupt the way people think about careers and work. The company has been around for a decade, but is still in the early days of a potentially epic long-term growth story. I see a tremendous buying opportunity in Fiverr at its currently modest valuation.
Anders Bylund has positions in Fiverr International and Micron Technology. The Motley Fool has positions in and recommends Fiverr International. The Motley Fool has a disclosure policy.