While many stocks in the market may look overvalued, there are just as many that fall on the opposite end of the spectrum. Two stocks valued at dirt-cheap levels that I think deserve more respect are PayPal (PYPL -2.00%) and Twilio (TWLO -2.85%).
Both stocks had solid years during 2020 and 2021 but have since cratered to levels not seen since years before the pandemic stock market frenzy occurred. I think each deserves a long look, as the companies aren't performing as poorly as their valuations would have you believe.
Let's take a look at why PayPal and Twilio could be great buys now.
1. PayPal
PayPal's payment processing platform has been instrumental in e-commerce. However, now that many commerce companies have their own payment processing software and smartphone providers have their proprietary digital wallets, PayPal is starting to look like the odd man out. However, PayPal's business has continued to perform quite well.
In Q1, net revenues rose 9% year over year, and earnings per share (EPS) spiked 61% thanks to various efficiency initiatives. Q2 isn't expected to be as great, with revenues only predicted to grow about 7%, but EPS should rise about 25%.
This efficiency increase is starting to make PayPal look like a real value and strong executor. Still, PayPal exceeded its own guidance by 1.5 percentage points in Q1, so if the current trends prevail, another beat could be in order.
With the stock trading at just 12 times forward earnings, it looks like a steal at these prices.
PYPL PE Ratio data by YCharts
Should PayPal reach these levels, its share buyback program will be highly effective and cause its EPS to grow continuously, even if the revenue growth isn't there.
That said, PayPal isn't without its risks. CEO Dan Schulman is retiring at the end of the year and has offered little update on the replacement search besides that a committee has been formed and a search firm was hired. The time frame continues to be by year's end, but you'd like to see this search happen faster so the new CEO can be brought up to speed before Schulman calls it quits.
This seems like a relatively small risk for PayPal's price. I think PayPal is worth a look here, as its valuation levels are some of the cheapest available for solidly executing large-cap companies.
2. Twilio
Twilio's product line is devoted to one task: customer communication. Whether through automated texts, programmable voice, or customized marketing campaigns, Twilio has multiple tools that make integrating these products into its clients' systems easy.
During the pandemic, customer communication became vital, as many businesses lost face-to-face communication. Since then, demand for Twilio's products has tumbled, with revenue only growing 15% year over year in Q1, compared to 60% or greater growth during 2021.
The key contributor to this slowdown is a hold on existing customer spending. Its net expansion rate, which measures how much a customer who stayed with Twilio spent this year compared to last, was only 106%, meaning these clients only spent $106 this year for every $100 spent last year. This marks a significant slowdown compared to the 130% range it achieved during 2021.
This all sounds like bad news. So why do I think the stock is attractive here? It boils down to efficiency gains and cheap valuation.
Twilio has significantly reduced its head count as it went through two rounds of layoffs. These layoffs helped increase Twilio's profitability, with the company posting a $104 million non-GAAP (generally accepted accounting principles) net income figure in Q1. While that isn't GAAP profitability, every company has to start somewhere when turning the profitability corner.
Still, it's hard to offset increasing profitability with poor guidance: Management believes its revenue will grow between 4% and 5% in Q2. But, for a stock valued like Twilio, it may still look like a buy.
TWLO PS Ratio data by YCharts
Consider that 2.2 times sales is a level that companies like banks trade at, not software companies. Should Twilio continue down its path to profitability, this stock will look like a bargain.
Plus, Wall Street analysts expect Twilio to return to more reasonable growth levels in 2024, with the average analyst predicting 11% revenue growth.
Both companies have a lot of work to do to regain investor trust. However, the expectation for success is extremely low, and the stocks are valued accordingly. There's a better chance for success than most are giving these two, and right now looks like a good time to buy.
But, I'd caution against going all-in, as both of these investments are turnaround plays. Keep the position sizing small (less than 1% of your portfolio); if one works out, it could be a portfolio boost. If they don't, then it won't have a significant effect on your returns.
