"Cheap" and "tech" don't often appear in the same sentence together. Most of the time, "tech" is associated with "overvalued." While this was the case a few months ago, with the recent market sell-off, some stocks are beginning to look attractively priced.
However, some stocks deserve to be cheap due to shrinking business or lousy execution. Two stocks that are cheap and still in great shape from a business standpoint are Alphabet (GOOG -0.96%) (GOOGL -1.10%) and Autodesk (ADSK -0.47%). Let's dive into these two stocks and see what makes them an attractive buy in today's market.
Alphabet's business segments have some of the most lucrative advertising spaces available. With the market dominance enjoyed by Google, YouTube, and the Android operating system, advertisers flock to those platforms to deliver their ads to a wide variety of viewers.
This ad concentration is also Alphabet's biggest problem. In its first quarter, Alphabet derived 80% of its revenue from advertising. With the direction the economy is heading in, a recession seems imminent. Advertising spending is usually cut during a recession, so investors expect Alphabet's revenue (and earnings) to decrease.
The pessimism has caused Alphabet's price-to-earnings (P/E) valuation to tumble to 20, the lowest since 2012. However, I believe this fear is overblown because of how well Alphabet fared during the last prolonged recession in 2008-2009.
I think Alphabet has the brand power to maintain its leadership position in the ad space, and while it may see reduced growth (its revenue still rose 23% year over year) in the first quarter, Alphabet will do fine.
Even if Alphabet sees short-term headwinds, it will emerge more robust than when it entered the recession. It also has a growing Google Cloud segment, up 44% year over year in Q1. The cloud computing industry is expected to be $1.6 trillion by 2030, and if Alphabet can maintain its current market share of 10%, this could be a $160 billion future opportunity for Alphabet. For reference, Alphabet's current annual revenue was $270 billion.
Investors will get an update on Alphabet's view of the economy on Tuesday, July 26, when the company reports earnings. However, with a lot of pessimism baked into the stock already, now might be a great time to purchase one of the world's most dominant companies.
With many software companies operating on a subscription model, the effect of a recession will be reduced on these companies. For example, Autodesk's customers used to be able to decide whether to buy the next iteration of its modeling software each year. When times were tough, they wouldn't upgrade. Now, customers don't have that choice, as they must pay an annual fee to continue using the product.
Autodesk's software is utilized by engineers and architects worldwide and is necessary for them to do their work. This necessity makes Autodesk a relatively recession-proof business. However, it still may see difficulty growing its sales if times are tough, as businesses may be reluctant to add more licenses.
Still, another advantage Autodesk possesses is its geographical diversity. In its fiscal year 2023 Q1 (ending April 30), its revenue split looked like this:
|Location||Percentage of Total Revenue||Q1 Revenue Growth (YOY)|
If the U.S. falls into a recession, Autodesk's growth will slow, but it won't disappear. Even with a potential recession on the horizon, management is still guiding fiscal year 2023 billings growth of 18% to 21% and earnings per share (EPS) of $3.93 at the midpoint.
Since switching to the subscription model, Autodesk's earnings have been erratic, and comparing its valuation to its pre-subscription model isn't helpful. However, looking at a more normalized number, Autodesk's price-to-free cash flow (P/FCF) ratio is 25, close to Alphabet's 23.
Autodesk is in great shape regardless of how the economy is faring. So right now represents a great time to hop into a company whose product is indispensable in architecture and engineering.