With the S&P 500 index up 16% in 2023 and the Nasdaq Composite index up 32%, it's generally been a great year for the market. Of course, not every stock has been a big winner.
Strong momentum for the broader market may have made it more challenging to find great deals, but there are still some great companies with promising long-term growth outlooks trading at big discounts. If you're on the hunt for cheaply valued stocks capable of delivering fantastic returns, read on to see why two Motley Fool contributors identified American Tower (AMT -0.70%) and PayPal (PYPL 2.90%) as great buys right now.
A discount on mobile data consumption's inevitable growth
Josh Kohn-Lindquist (American Tower): A recent Ericsson Mobility Report showed that mobile data traffic in the United States is expected to rise by 20% annually through 2028. This megatrend may be one of the most inevitable propositions of the modern era.
So, where should investors examine to benefit from this growth?
Look no further than American Tower, the second-largest real estate investment trust (REIT) in the U.S. American Tower owns, operates, and develops the towers that wireless service carriers and data providers, broadcast companies, and government agencies need.
Home to over 226,000 of these communication sites globally, the company signs long-term lease agreements with its clients that usually rise by 3% annually. Most of these leases are non-cancelable, giving American Tower a massive, long-term, recurring revenue stream worth over $62 billion.
However, despite this incredibly sticky revenue, the market has recently sent American Tower's share price downward.
Down around 28% over the last year and 42% from its high, the company saw its sales growth slow to 4% in its latest quarter as it lapped 20% growth figures from the prior year. Making matters worse, ballooning interest rates have the market worried over American Tower's net debt of $45 billion.
The good news, however, is that 85% of this debt is fixed-rate, leaving the company less vulnerable to rising interest rates. Furthermore, American Tower has generated an average of $2.7 billion in free cash flow (FCF) over the last five years -- which, paired with its recurring revenue, makes this debt load manageable.
While this FCF has dipped over the last year due to increased capital expenditures, the company's price-to-sales (P/S) ratio has fallen to a near-decade-long low.
AMT PS Ratio data by YCharts.
Consequently, its 3.4% dividend yield is the highest it has ever been, offering passive income seekers more bang for their buck.
The cherry on top of it all for investors?
American Tower's $10 billion acquisition of data center REIT Coresite leaves it well positioned to benefit from the data-dense workloads created by the influx of new artificial intelligence (AI) use cases. Coresite's 24 data centers tie in beautifully with American Tower's wireless capabilities, making the combined company a force to be reckoned with in the edge computing industry -- and a top long-term buy at today's discount.
This beaten-down stock is poised for a rebound
Keith Noonan (Paypal): Despite the rally for the stock market this year, PayPal stock has tumbled roughly 12% across 2023's trading. The fintech's share price is now down approximately 80% from the high that it reached amid pandemic-driven engagement tailwinds back in July 2021.
Admittedly, it's not just the waning of pandemic-related demand and macroeconomic shifts that have tanked the company's valuation. PayPal has seen its pricing power erode as new competitors have entered the payment-services space. Investors are also antsy about the departure of long-serving CEO Dan Schulman, who will be replaced by former Intuit executive Alex Chriss later this month.
On the other hand, PayPal's business remains highly profitable, and the company looks cheaply valued at today's prices. Valued at less than 13 times this year's expected earnings, the stock offers attractive upside potential for long-term investors.
PYPL P/E Ratio (Forward) data by YCharts.
While the company's cut on transactions has been pressured, the business is still serving up solid results. Total transaction volume rose 11% year over year to hit $76.5 billion in the second quarter, helping to push sales in the period up 7% to $7.3 billion. Meanwhile, sales growth and cost-cutting initiatives pushed non-GAAP (adjusted) net income up 20% to reach $1.6 billion.
Even with the digital payments space generally becoming more crowded, the market is still poised for big growth over the long term. The industry is big enough to support multiple successful players, and PayPal is well positioned to ride out challenges posed by some shifts in the competitive landscape. Thanks to its massive user base and existing tech infrastructure, the company also has advantages when it comes to launching new services on top of its existing foundations.
With the company returning to earnings growth and trading at meager price-to-earnings multiples, PayPal stock offers an attractive risk-reward proposition.
