Famed Investor Warren Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Buffett's mentor Benjamin Graham also declared that "in the short run, the market is a voting machine, but in the long run, it is a weighing machine." In other words, investors shouldn't blindly pay the wrong price for the right company.
Many investors learned that lesson the hard way over the last 18 months or so when concerns about rising interest rates helped pop the bubbly valuations of many higher-growth tech stocks. However, many popular tech stocks still look a bit pricey after that steep pullback. Today, I'll examine three of those stocks -- Nvidia (NVDA +1.73%), Cloudflare (NET 23.53%), and Roblox (RBLX 6.57%) -- and explain why they deserve to trade at lower valuations.
Image source: Getty Images.
1. Nvidia
Nvidia is the world's leading producer of discrete GPUs for PCs and data centers. It experienced a major growth spurt during the pandemic, which drove more people to buy new PCs for remote work, online classes, and video games. The surging usage of cloud-based services also prompted more companies to upgrade their data centers.
NASDAQ: NVDA
Key Data Points
Unfortunately, Nvidia's growth decelerated after the pandemic ended, and PC sales dropped off a cliff. The macro headwinds also forced many companies to rein in their spending on data center upgrades. As a result, Nvidia's revenue stayed flat in fiscal 2023 (which ended this January) as its adjusted earnings per share dropped 25%.
But for fiscal 2024, analysts expect Nvidia's revenue and adjusted EPS to rise 12% and 36%, respectively, as the PC market stabilizes and the growth of the artificial intelligence (AI) market lifts its sales of data center GPUs. That outlook is encouraging, but a lot of AI hype seems to be baked into its stock at 60 times forward earnings and 22 times this year's sales.
By comparison, its closest competitor Advanced Micro Devices -- which also faces a tough slowdown in the PC market -- trades at 29 times forward earnings and 6 times this year's sales. Therefore, it wouldn't be too surprising if Nvidia's stock gets cut in half before it's considered a bargain for value-seeking investors.
2. Cloudflare
Cloudflare's cloud-based content delivery network (CDN) accelerates the delivery of digital media for websites. It also shields those websites from bot-based attacks. The market's demand for Cloudflare's services skyrocketed as companies created more media-intensive websites to capitalize on higher internet speeds.
NYSE: NET
Key Data Points
Between 2019 and 2022, Cloudflare's revenue rose at a jaw-dropping compound annual growth rate (CAGR) of 50%. It also turned profitable on a non-GAAP (adjusted) basis for the first time in 2022. But for 2023, Cloudflare only expects its revenue to rise 31% to 32%. That deceleration, which it blames on tough macro headwinds, coincides with an ongoing decline in its dollar-based net retention rates -- which dropped from 127% to 117% between the first quarters of 2022 and 2023.
Cloudflare's slowdown wasn't disastrous, but its stock previously surged to dizzying valuations during the buying frenzy in growth stocks last year. Even after plunging more than 50% over the past 12 months, Cloudflare stock still doesn't look cheap at 12 times this year's sales. For reference, its rival CDN providers, Fastly and Akamai, currently trade at 5 and 4 times this year's sales, respectively. So if Cloudflare continues to lose its momentum, its stock could drop a lot further.
3. Roblox
Roblox's gaming platform enables its users to create simple block-based games without any coding experience. They can also share those games with other users and monetize them with a virtual currency called Robux. Roblox's growth accelerated during the pandemic as more students stayed at home and spent more time playing its games.
NYSE: RBLX
Key Data Points
Roblox's growth cooled off as the pandemic passed, and those students returned to school. Its gross bookings only rose 5% to $2.9 billion, compared to its 45% bookings growth in 2021, as its net loss widened from $492 million to $924 million. For 2023, analysts expect its bookings to rise 17% to $3.4 billion as it laps its post-pandemic slowdown -- but they also expect its net loss to widen to $1.05 billion.
Roblox served 58.8 million daily active users at the end of 2022, but it's still deeply unprofitable for two reasons. First, it's expanding beyond its core market of tween users by courting older and overseas users -- but those newer users are buying less Robux than its younger users in the U.S. and Canada. Second, its developer exchange fees -- the cash which it pays its creators for trading in their Robux -- are eating up most of its revenues. It could potentially boost its margins by reducing its Robux exchange rate, but doing so would likely alienate its top creators. Roblox's stock isn't cheap at 6 times this year's bookings, so it could still get a lot cheaper if it doesn't solve those two pressing issues.
