Finding undervalued tech stocks in today's fast-changing world isn't always easy. But for those who know where to look, it can be done. And the financial rewards can be staggering.
To help get you started, we asked three Motley Fool contributors to each pick an undervalued tech stock they believe investors would be wise to buy right now. Read on to see why they chose payments technology specialist PayPal Holdings (NASDAQ:PYPL), wireless network operator T-Mobile US (NASDAQ:TMUS), and GPS device leader Garmin (NASDAQ:GRMN).
Paying the (right) price for profitable growth
Steve Symington (PayPal): PayPal investors endured a modest drop in share price after the payments technology company reported fourth-quarter 2016 results late last month. But considering those results were in line with expectations as PayPal effectively positioned itself for sustained, profitable growth going forward, it's no surprise that PayPal stock has since erased those declines.
Quarterly revenue and adjusted earnings per share both climbed 17% year over year in Q4, while payment transactions and total payment volume jumped 23% and 22%, respectively. PayPal also added 5.4 million customers last quarter, bringing its active customer accounts to 197 million (up 10% for the year). Cash flow remained healthy, with cash from operations of $923 million and free cash flow of $771 million for the quarter.
But more important are the growth trends underlying PayPal's solid headline numbers. In particular, PayPal is already taking advantage of consumers' ongoing shift to mobile payment platforms, with mobile total payment volume (TPV) climbing 55% year over year in 2016, to over $100 billion. That included 53% growth in mobile TPV last quarter alone, to $31 billion, representing roughly 31% of consolidated total payment volume. Meanwhile, PayPal signed new partnership agreements with both Citi and Fidelity National Information Services last quarter, both of which should serve to make its own services even stickier and further scale the business.
Given its healthy growth, strong cash flow generation, and shares trading at a reasonable 20.6 times forward earnings as of this writing, I think now is a great time for long-term investors to open or add to a position in PayPal.
Don't get hung up on P/E
Anders Bylund (T-Mobile US): With shares trading at more than 33 times forward earnings, I know that T-Mobile US (NASDAQ:TMUS) doesn't look cheap at a glance. But if you dig a little deeper, you'll find a ton of potential value yet to be unlocked here.
T-Mobile is easily the fastest-growing major American telecom these days. The self-avowed Un-carrier is taking subscribers away from its larger rivals by shaking up traditional business practices in consumer-friendly ways. Some of these policies can be expensive, but T-Mobile still turns reliably positive cash profits.
Yes, the net income upon which price-to-earnings ratios are calculated tends to skim close to the breakeven line. (You can call it thin profits or effective tax strategy.) But the underlying cash flows and EBITDA are solid, and analysts expect T-Mobile's bottom line to firm up considerably in the next few years.
The result is a PEG ratio of just 0.84, straddling the line between reasonably priced and downright cheap. T-Mobile is a promising value stock hiding behind a fluffy P/E ratio.
Tracking toward growth
Demitri Kalogeropoulos (Garmin): Even following their 40% spike over the last 12 months, Garmin shares seem incredibly cheap. The GPS device specialist is valued at less than 19 times earnings as of this writing, putting it in the bottom quarter of tech companies on the S&P 500 by valuation.
That's too low, in my opinion, for a business that has seen its gross profit margin rise to almost 60% of sales as revenue improved by 6% over the last nine months. That success is even more impressive when you consider that the auto division, Garmin's biggest, is down nearly 20% over that time. Management's smart investments into innovation in fitness devices is completely countering the shift away from car GPS units. In fact, revenue in the fitness segment spiked 32% last quarter on an improving profit margin thanks to hits like the Elevate watch and vivofit activity tracker.
Yes, it's possible that Garmin will announce disappointing holiday-season results when it posts fourth-quarter earnings on Feb. 22. Rival Fitbit (NYSE: FIT), after all, recently warned that weak demand pushed its holiday unit sales down to just 6.5 million from 8.2 million in the prior year. But that's where Garmin's diversity should pay off. Fitness makes up just one-quarter of sales, and it isn't even its fastest-growing unit. Executives see the outdoor segment spiking by 24% this year (compared to a 22% pop for fitness) as it soaks up market share in the luxury wearables segment.