The stock market is starting to broaden, with some low-tech value plays helping propel the S&P 500 ahead of the growth- and tech-heavy Nasdaq 100 for a change. Undoubtedly, the great rotation from mega-cap tech to other less-heated parts of the market, including the small- and mid-caps, may begin a prolonged breather for the Magnificent Seven and equally hot semiconductor firms.
As for the cloud computing stocks, I see ample room for a rebound runway, especially regarding the names at or around 52-week lows (or, in some cases, multi-year lows). As the top cloud innovators tap into artificial intelligence (AI), perhaps the less-appreciated cloud laggards benefit from the market’s broadening out in the year’s second half.
Here is a trio of undervalued cloud stocks that look too cheap as we progress through the third quarter.
Snowflake (SNOW)
Data warehousing firm Snowflake (NASDAQ:SNOW) is close to multi-year depths at $136 and change per share. SNOW stock has been under extreme pressure as more details arose from recent data breaches affecting some Snowflake customers.
Most notably, Snowflake client AT&T (NYSE:T) got caught up in the historic data breach. Notably, the breach wasn’t due to an issue with the Snowflake platform but rather an issue with “exposed credentials.” Either way, the situation isn’t good for Snowflake as the firm looks to turn the tide.
Given the magnitude of the breaches, many investors may be inclined to cut their losses in a name that can’t seem to hang onto any gains.
Whether talking about the big data breach, the CEO change made earlier this year, or the softer, forward-looking guide, you don’t need to look far for reasons to sell the cloud data stock right here while it’s a falling knife.
The stock is oversold for investors looking to snag a bargain in a name that is still a (small) part of the Berkshire Hathaway (NYSE:BRK-B, BRK-A) portfolio. Snowflake is a cloud AI play that could surprise investors.
Zscaler (ZS)
Zscaler (NASDAQ:ZS) is a security firm that has been on the mend for around a year and a half. Despite rolling over this Spring, ZS stock is still up more than 33% over the past year. The dip seems more than buyable for investors comfortable with Beton, a relatively small large-cap with a market cap close to $30 billion.
Though a smaller cybersecurity player, Zscaler has unique growth catalysts that could help it gain power. Apart from rising cybersecurity demand from every publicized breach, Zscaler also stands to gain from smart collaborations with firms like Nvidia (NASDAQ:NVDA) and a more focused go-to-market strategy.
Even if IT cloud budgets stay softer for longer, Zscaler’s security solution stands out as a relatively easy sell in a time when cybersecurity angst is everywhere. At 60.9 times forward price-to-earnings (P/E), ZS looks quite lofty. If the company can get AI right, the name may be worth the premium.
Alibaba (BABA)
Chinese tech giant Alibaba (NASDAQ:BABA) stands out as one of the cheapest cloud and AI stocks in the global market right now. With BABA stock still down around 74% from its 2020 all-time high, the name stands out as a deep-value play, even given the geopolitical risks associated.
At the time of writing, BABA stock is trading for 18.19 times trailing P/E. Such a depressed multiple seems to discount Alibaba’s potential AI prowess. With new generative AI translation tools recently rolled out to international merchants, it’s about time we view the firm as every bit as AI-savvy as its U.S.-based tech rivals.
With Alibaba Cloud AI and an unstoppable presence in the Chinese market, perhaps it’s time to bottom-fish for BABA stock, even if it means riding the rough tides out for another year or two.
On the date of publication, Joey Frenette held shares of Berkshire Hathaway (Class B) and Snowflake. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
