While there are plenty of undervalued tech stocks to consider right now, it’s important to understand why the sector is struggling to avoid falling knives. One of the major challenges for the sector is valuations — the high-growth era we’ve just come out of meant investors were willing to pay top dollar today for earnings that might materialize 10 years down the line. However, inflation makes future dollars worth less in today’s terms. So simply based on math, valuations had to come down.
There’s more to it than just working out the present value of a company’s earnings, though. The ongoing bouts of layoffs were another red flag for investors. After all, companies with tons of potential rarely trim their workforce. Thanks to the pandemic-related boom in the tech sector, many companies went on hiring sprees to support their rapid growth. At the time it was a smart move. It’s also smart to star trimming some of the fat as growth starts to taper. For many companies, the layoffs can be viewed as a recalibration rather than a last-ditch effort to stay afloat.
The bottom line is that the tech space will always offer pockets of innovation and growth. Disruptors, market-leaders and innovators will always be rewarded, so that’s a good place to start looking for undervalued tech stocks. Companies that have been beaten down by deteriorating sentiment within the sector, but which have strong financials and a solid growth story are worth considering.
Undervalued Tech Stocks: Alphabet (GOOG, GOOGL)
Alphabet’s (NASDAQ:GOOG, GOOGL) bread and butter comes from advertising, and the current environment in which everyone’s tightening the purse strings has been hard to navigate. However with shares down roughly 20%, the market could be overdoing the negative sentiment, making this one of the best undervalued tech stocks on the market.
The sheer scale and power of Google is a huge advantage — and it’s something that an economic downturn won’t undo. Sure, ad dollars are becoming harder to win and that stings a little bit. But ultimately the group’s well placed to weather inflation. The company’s platforms are simply too big for marketers to ignore.
Advertising profitability means the group is flush with cash to funnel into its future prospects. Cloud is perhaps the most promising of these — but between AI and self-driving vehicles there are plenty of smaller projects that could lead the way into the next tech frontier.
The group’s valuation has come down somewhat amid the recent sell off, and although it’s managed to claw some of that back recently, the current share price is still great value.
Workday (NASDAQ:WDAY) offers businesses human resource and financial management software as a subscription. While this might not sound exciting, sometimes boring is best. The market for these kinds of products is poised to continue growing, so the 15% drop in WDAY stock over the past year puts it onto the list of undervalued tech stocks.
Workday’s software allows companies the ability to scale their operations efficiently, and that’s a priceless investment in the current environment. Revenue growth in the most recent quarter was within touching distance of 20% and underlying profit growth beat expectations. The earnings report was a success by most measures — but conservative guidance taking into account the challenging environment ahead disappointed the market.
Conservative guidance is the right move given the uncertainty, and it opens the door for an earnings beat in the months ahead. Plus, even if things are lean in the coming year, Workday’s long-term growth potential holds. For now the group seems to be in a strong position to continue delivering above-average growth, and it’s current share price doesn’t seem to reflect that sentiment.
Microsoft (NASDAQ:MSFT) has been one of the most undervalued tech stocks for years now and the current environment is only extending its time in the bargain bin. The group’s office suite is a fixture in corporate offices around the world. These legacy businesses offer a solid foundation on which Microsoft can grow, with its cloud arm in particular, offering a long runway.
Azure offers customers a subscription-based cloud model that allows for scalable growth without the high up-front costs of setting up and maintaining your own servers. And given that many of its customers are already using Microsoft office products, there’s a huge opportunity for cross-selling.
The group’s also beefing up its gaming arm with the acquisition of Activision Blizzard, assuming competition authorities give it the green light. The purchase put a sizeable dent in an otherwise solid balance sheet, but it should more than enough to plug the gap once it’s up and running.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.