Investors on the hunt for a bargain in the tech sector have lots of choices right now. Today, I'll give you a closer look at two top tech stocks trading under $20 that offer a tantalizing combo of growth and value: 8x8 (EGHT -0.18%) and Palantir Technologies (PLTR -2.06%).
8x8: rock-bottom valuation at $4 per share
8x8, a leading provider of cloud-based unified communications and contact-center solutions, has seen its share price tumbling in recent months. The stock is down 67% over the last 52 weeks and 26% in the last month alone. But this slump has led to rock-bottom valuations with 8.3 times forward earnings, 0.62 times sales, and 9.6 times free cash flow (FCF).
Despite the recent price decline, 8x8 reported impressive third-quarter 2023 results last month. Sales grew 18% compared to the year-ago period, adjusted operating profit soared from $3.1 million to $18.3 million, and annual recurring revenue (ARR) was up 22% to $698 million.
On top of that, 8x8 was named a leader in Gartner's Magic Quadrant for Unified Communications as a Service (UCaaS), a long-term growth market that's currently in a temporary slump. Once the inflation-marred economy gets back on its feet and IT managers get their hands on budget increases again, you'll see UCaaS orders surging as well.
As for the growth strategy, management will fight hard for a hand-picked selection of profitable contracts. This company wants to impress the right client to sign a multiyear deal with a complete package of leading-edge functionality.
"If it's just a straight low-margin, high-volume seat deal, we generally pass on it," interim CEO Sam Wilson said at a telecom industry conference in early March. "Verizon or AT&T (NYSE: T) is going to win that business."
Pick your battles if you want to win the ones that matter the most. This profit-seeking competitive strategy sets 8x8 apart in a jam-packed market that always teeters on the edge of a price war.
Palantir: premium-priced growth at $8 per share
Palantir's stock chart has been wobbly lately, going down 38% in 52 weeks. However, as we saw with 8x8, don't let the stock's short-term trends fool you.
We're talking about a sector-leading expert in data analytics, and an early mover in applying artificial intelligence (AI) and machine learning (ML) to those workflows. Digital elbow grease is increasingly important in the tech sector, and automated AI tools help a lot.
Palantir recently reported fourth-quarter 2022 revenue going up by 18% year over year to $509 million, as adjusted free cash flow rose 15% to $76 million. This report also delivered the company's first-ever quarter of positive earnings based on generally accepted accounting principles (GAAP). It wasn't much of a gold rush at $0.01 per share, but everyone starts from zero somewhere.
Now that the break-even glass ceiling has been shattered, Palantir should see many more unadjusted earnings figures printed in black ink instead of red.
Plus, Palantir works in a fast-growing subsector with miles and miles of long-term gains ahead. It doubled its healthcare-deal signings last year, and two leading Coca-Cola bottlers are working with the company.
Chef operating officer Shyam Sankar added even more spice to the story in February's fourth-quarter earnings call: "In 2022, our software foiled a plot to overthrow the German government, delivered $200 million of return to Tyson Foods, and powered companies through the energy crisis. Our momentum stems from the fact that we have built software that actually works, not software that's easier to sell."
In other words, Palantir's software is effective and can deliver real results to its most important clients.
This stock isn't cheap despite its single-digit share price. Remember, stock prices are not the same thing as a company's overall market value or the quality of its operations. So Palantir's $8 stock trades at 9 times sales and 34 times forward earnings. That's not cheap, despite the modest stock price.
But it can be the right choice if you prefer investing in high-octane growth businesses. Thanks to its proactive focus on applying AI and machine learning to data analytics, I think you're looking at a new Ferrari in a sea of tricycles.
Sizzle or fizzle: What could go wrong?
When you think about investing in these low-priced tech stocks, it's important to be aware of the risks involved. No investment is ever completely risk-free, and these two tip-top tech tickers are no exception.
One significant risk for both 8x8 and Palantir is their lumpy revenue streams. One large deal won or lost can significantly impact their financials and make it difficult to forecast long-term trends.
Furthermore, 8x8 is a relatively small player in a huge but crowded market. Larger competitors might hold the upper hand in hard-fought contract negotiations, thanks to deeper pockets and better-known brand names.
Palantir is less exposed to that particular issue, but the stock trades at a premium valuation, which could limit its upside potential if its growth plans don't pan out.
Low stock prices, lofty growth ambitions
Despite these risks, both companies are well positioned to benefit from the growth of their respective industries. Palantir has seen significant growth in its U.S. and international government sales with a steady inflow of high-profile names to its customer list. Similarly, 8x8 is a leader in UCaaS with a smart focus on high-value customer contracts.
For investors who can handle some risk and have a patient hunger for business growth, 8x8 and Palantir offer plenty of upside potential. These stocks are worthwhile picks for investors with a keen noggin for a good deal -- even if their valuations aren't always in the bargain-basement category. A top-shelf business is worth a gilded price tag sometimes. In this case, even Palantir's premium price tag is printed with a single digit.
