Cheap tech stocks aren't always easy to find, but the market sell-off over the last year has made that task a little easier. The Nasdaq is down nearly a third from its peak last November as rising interest rates and fears of a recession have squeezed valuations.
That's created some appealing opportunities for bargain hunters as tech stocks are likely to lead the recovery, much like they did in 2009 during the financial crisis. Keep reading to see two bargain stocks that could surge in the next bull market.
1 The FAANG stock Wall Street is underestimating
Alphabet (GOOG -1.94%) (GOOGL -2.15%) plunged on its latest earnings report, and it's clear why. Revenue growth slowed to just 6%, and profits fell as costs of employee salaries and other expenses outpaced revenue growth.
After that sell-off, shares of the Google parent are now down 36% from their peak a year ago. But in spite of that slide, there are two major reasons why investors should expect the stock to bounce back.
First, management told investors on the earnings call that it would slow the pace of hiring in the fourth quarter and into 2023. It expects headcount to increase in the fourth quarter by less than half the increase in the third quarter, and said the slower pace would continue into 2023. Slower growth in its expenses should help the company return to profit growth next year.
The other reason that the stock looks ready for a bull run is that advertising is cyclical, and demand from advertisers should return once fears of a recession subside, or when the economy starts to bounce back if one hits. Management made several references to macro headwinds on the recent call, and other advertisers like Meta Platforms and Snap are feeling the sting as well.
During the financial crisis Alphabet's revenue growth slowed to just 2% in the second quarter of 2009, but rebounded to above 20% by Q1 2010. Investors could see a similar trend play out this time around. The good news there is that the stock actually bottomed in 2008 before revenue growth did, so there's a good chance the stock will start its recovery before the underlying business does.
Alphabet's price-to-earnings ratio of 18.5 is slightly lower than the S&P 500's multiple, but the business should outgrow the broad market over the coming years. Given that, the stock is a good bet for a rebound.
An under-the-radar ad tech stock
While digital advertising platforms have struggled this year as demand growth has slowed, ad tech businesses have been more resilient. Advertisers and publishers rely on ad tech platforms to automate bidding and campaigns, and one small-cap ad tech stock that has continued to deliver strong results in a challenging economy is Perion Network (PERI 5.42%).
Perion operates largely through its intelligent hub, which connects brands with publishers to make advertising more efficient and increase return on investment for both brands and publishers. It also offers premium, value-added service like a "connected cart" that allow shoppers to scan a Connected TV ad to purchase a product with a QR code. And it offers live picture-and-picture advertising during a sports event that can be shown without disrupting the viewing experience.
The company has also introduced a new cookie-less tracking technology called SORT, which is gaining rapid adoption with customers, including Mercedes, in the most recent quarter. SORT positions Perion well for when Google ends third-party cookies on Chrome, which is expected to happen in 2024.
The small-cap stock already released preliminary results for the third quarter, showing off 31% revenue growth to $158 million, while adjusted EBITDA jumped 76% to $31 million, giving it a 20% adjusted EBITDA margin.
Because Perion is still a small company, it could grow rapidly even in a challenging macro environment, as it's much easier for it to grow by gaining market share than it is for a company like Alphabet.
Despite its rapid growth and profitability, the stock is cheap at a P/E ratio of just 16. If it can maintain its growth rate through the coming quarters, the stock could move a lot higher as it gains credibility from investors.
