As the market recovers from the lows sustained entering the year, some stocks are starting to look expensive. That's because investors are bidding up the stocks in anticipation of a turnaround. However, a few stocks haven't had that luxury, and they look like strong candidates to purchase right now.
So if you've got $1,000 lying around, these could be excellent stocks to add to your portfolio.
1. Amazon
Amazon (AMZN 3.43%) is a broad business, with products ranging from e-commerce to advertising to cloud computing. However, it trended more toward higher-margin businesses like cloud computing and advertising as of late. This helped Amazon grow its gross margins significantly over the past decade.
AMZN Gross Profit Margin data by YCharts
Higher gross margins indicate a greater maximum profit margin potential, so companies with higher gross margins (like software companies) usually trade at a higher premium than a retailer like Amazon. With Amazon trading at a low price-to-sales valuation despite its gross margin improvements, this leaves room for a great investment opportunity.
Part of the reason Amazon hasn't been as attractive to investors is that the promise of better bottom-line margins hasn't come true. After overexpanding to meet COVID-fueled demand in 2020 and 2021, Amazon had to lay off workers, shutter various initiatives, and close warehouses to improve its profitability. It's still working through that process, but the improvements are starting to show up in quarterly results.
With Amazon's stock looking undervalued despite its efficiency improvements, it looks like a strong buy.
2. PayPal
Fintech isn't the exciting trend it used to be. Instead, it was replaced by software-as-a-service (SaaS) companies, then the metaverse, and now AI (artificial intelligence). With fintech giant PayPal (PYPL 2.90%) struggling to garner any attention, its stock price plummeted, now trading at levels last seen in 2017.
Sentiment isn't the only reason for PayPal's stock demise. The company had a few slipups over the past few years but is still a strong business. In Q1, revenues rose 9% year over year, with total payment volume rising 10%. While that's market average growth, what is impressive is its earnings growth.
Earnings per share (EPS) rose 61% to $0.70 in Q1, and management expects this trend to continue throughout 2023, with 2023 EPS expected to come in at $3.42, compared to $2.09 last year -- a 64% increase.
This trend is likely why PayPal's stock has become undervalued: It is no longer a growth stock; it's a value play. Looking at it from that angle reveals a great buying opportunity.
PYPL PE Ratio (Forward) data by YCharts
With the stock trading at 13 times forward earnings, PayPal's stock looks like a genuine bargain, and investors should pile in before Wall Street begins to notice this stock.
3. Twilio
Twilio (TWLO 1.47%) has become integrated into many business systems. Its technology powers automated text messages, customized marketing emails, and programmable voice lines for thousands of clients. However, many customers signed up for Twilio when it was desperately needed during 2020 and 2021. While these clients aren't cutting Twilio's products outright, they are reducing their usage, which is an issue for a company that uses consumption-based pricing.
This is evident in Twilio's latest quarterly results, as revenue grew 15% to $1.01 billion, marking a significant deacceleration from 2022 Q1's 48% growth. However, it will get worse, as Twilio's Q2 guidance indicated 4% to 5% revenue growth.
This slowdown is concerning for a company that is still working to achieve generally accepted accounting principles (GAAP) profitability. Although Twilio has gone through multiple rounds of layoffs to slash expenses, it still posted an operating loss margin of 26%, which rises to a 14% loss after one-time restructuring costs are subtracted.
So why is Twilio a bargain buy if it's not profitable and doesn't have the growth to get it there? It all comes down to valuation. With the stock trading at 3 times sales, Twilio stock is cheap for a software company.
TWLO PS Ratio data by YCharts
This low price has been earned by Twilio's poor execution and weak guidance. But that's only for one year. If you look into 2024, Wall Street analysts are expecting 11% growth, which could be enough to fuel new shareholder interest.
With Twilio's stock trading at these levels, a minor position could grow into a large one once business picks up again.
