The tech sector offers many high-growth companies that have outperformed the market and rewarded long-term investors. However, the issue with consistent outperformance is that valuations can become frothy for new investors.
For instance, Super Micro Computer (NASDAQ:SMCI) was a bargain last year that traded at a 16 P/E ratio at certain points. It seems like every investor now knows about that AI stock. Shares are up by roughly 300% year-to-date and trade at a 37-forward P/E ratio.
Some investors will argue that SMCI stock is significantly overvalued while others argue the stock still has plenty of room to run. However, one thing is clear — it’s not the same bargain it was a few months ago.
It’s still possible to find undervalued tech stocks and these three picks stand out.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) shares are trading lower than in August 2021. This fact demonstrates how much investors have been irked by the company’s recent artificial intelligence blunders.
Bard and Gemini have endured high-profile mishaps that made investors nervous about Alphabet falling behind Microsoft (NASDAQ:MSFT) in the AI race. Alphabet does have some catching up to do, but it arguably has more data than any corporation.
Alphabet knows what we search, the content we engage with and which websites we visit. The firm knows about people’s ages, genders and other details when we create Google accounts. Many people rely on Alphabet for Google Search, YouTube, Google Cloud, Gmail, Google Docs and various tools.
A corporation’s success in many areas doesn’t guarantee future success as a stock. However, Alphabet offers an enticing 24 P/E ratio and solid financial growth. The firm reported 13% year-over-year revenue growth in the fourth quarter of 2023. Cost cutting and a stronger focus on profitability resulted in a 52% year-over-year increase in profits. That resulted in a 24.0% net profit margin.
These types of results seem likely to be more common. Once Alphabet releases more earnings reports like these, AI blunders will go in the rearview mirror.
Perion (PERI)
Perion (NASDAQ:PERI) is a smaller advertising company well-positioned in several high-growth advertising segments. The firm has exposure to connected TV ads, digital out-of-home ads and other channels.
Investors are concerned about a partnership with Microsoft that is set to expire this year. It should get renewed in late October or early November, but no renewal can impact almost half of the company’s revenue. Another concern was a year-over-year decline in display advertising revenue.
Q4 revenue increased by 11.7% year-over-year, while net income only inched up by 1.9% year-over-year. These aren’t the best growth rates, especially for investors who have followed the stock for years. Perion has normally achieved revenue and net income growth above 20% year-over-year, but those growth rates have slowed down.
However, the current valuation makes Perion look like a bargain. The stock only trades at a 9 P/E ratio and a 0.34 PEG ratio. The stock’s valuation looks even more captivating, considering the firm has more than $400 million in cash, cash equivalents and short-term bank deposits. The corporation has a $1.1 billion market cap. Most of its value is held up by cash. Investors wanted more in the fourth quarter, but the company has a long history of revenue and earnings growth.
Fortinet (FTNT)
Fortinet (NASDAQ:FTNT) is one of the best-valued cybersecurity stocks that combines growth potential with a 49 P/E ratio. Headwinds have hurt the company, but the firm took a step in the right direction with 10.3% year-over-year revenue growth in the fourth quarter of 2023.
Net income was slightly down year-over-year, and profit margins stayed above 20%. Fortinet had a history of growing its revenue by 30%+ year-over-year while expanding profit margins. That’s why investors haven’t been as excited about its recent financials.
Guidance for fiscal 2024 suggests revenue growth will fall below 10% for the year. Investors will need to wait a bit for this stock to turn things around. It may be worth monitoring this stock rather than buying it right away. Trading covered calls can offer some upside as the growth narrative gets back on track.
Once Fortinet’s tailwinds return, it can rally in a big way. The stock has outperformed the stock market for a while and is up by 339% over the past five years. The cybersecurity giant’s current breather can present a long-term buying opportunity.
On this date of publication, Marc Guberti held long positions in GOOG and PERI. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
