The three most-watched stock market indexes for the U.S. markets soared in 2023. That's a refreshing rebound from the deep plunges these market trackers posted in 2022. The Dow Jones Industrial Average has gained 14% year to date while the S&P 500 index rose 25% and the tech-heavy Nasdaq Composite increased by 45%.
So the markets generally bounced back amid soaring valuations, but some great stocks didn't get the memo. The disconnect between fantastic companies with lagging stock returns has created some no-brainer buying opportunities. Alphabet (GOOG 9.96%) (GOOGL 10.22%) and Roku (ROKU -10.29%) are particularly tempting in my eyes, and I would gladly buy them hand over fist at their current share prices.
Read on to see what investors need to know about these two incredibly undervalued growth stocks.
Image source: Getty Images.
Alphabet: From search engine to tech titan
Google parent Alphabet is going places, both in the long run and in the immediate future.
From a long-haul perspective, I love Alphabet's ability to roll with the punches. The company rode into Wall Street on a horse named Google, and that's still Alphabet's most important business by a wide margin -- but the reorganization into an umbrella company created a multi-sector conglomerate of the future.
Online search and advertising remains a cash cow for Alphabet, responsible for 89% of total revenue in the recently reported third quarter. But times are changing. Five years ago, Google-branded services generated 99.6% of Alphabet's overall sales. Back then, the Google Cloud service was rolled into "other bets" with minuscule business contributions. Today, Google Cloud generates 11% of the third quarter's consolidated sales and was reported as a significant standalone operation (using the Google brand but not lumped into the Google division).
Cloud-based artificial intelligence (AI) and the continued growth of software-as-a-service (SaaS) offerings will drive Google Cloud to even greater heights in 2024 and beyond. The success of a formerly hobby-level operation goes on and I can't wait to see how Google Cloud grows over the next few years.
The next big winner might be the Waymo self-driving car business, the Calico medical research experiment, or some "other bet" outsiders haven't even heard of yet. This ability to morph with changing markets will keep Alphabet relevant for decades to come, rewarding shareholders every step along the way. That's my long-term thesis for owning Alphabet stock, anyway.
And then there's the closer future. The ongoing AI frenzy is far from the whole story, but undeniably good news for the Google Cloud operation. In fact, I expect Google Cloud's AI business to balloon in the next couple of years as businesses of every stripe turn to the big three cloud computing platforms in search of top-notch AI services.
Yes, Google Cloud is the third-string option with a smaller general market share than Amazon Web Services and Microsoft Azure. But the platform brings unique AI features that its larger rivals may not be able to match, such as Google's own AI accelerator chips, competitive pricing, and unbeatable network performance. Many clients maintain active accounts with all of the leading cloud platforms, and the workloads could shift quickly from one service to another when a new competitive advantage emerges.
So Alphabet is arguably the most flexible company I've ever seen and the current focus on AI gives the company a springboard from which to launch another business surge. Alphabet offers robust long-term prospects, exciting growth drivers for the immediate future, and shares trading at just 21 times forward earnings projections.
What's not to love? I've been a happy shareholder since 2010 but now I'm tempted to buy some more. You can't really go wrong with this AI-flavored investment.
Roku: A hidden gem in plain sight
It's easy to write Roku off as a short-lived market darling from a different era. The media-streaming technology expert's stock soared all the way to $479 per share in the summer of 2021, when the coronavirus pandemic kept people glued to their movie-streaming services and before the inflation crisis reared its ugly head.
The fall to $39 per share at the end of 2022 looked like the beginning of the end. Roku's impressive revenue growth slowed down amid weaker ad sales, completely halting in the fourth quarter of last year. Investors ran way, slamming their "sell" buttons in a rage. Today, Roku's stock has posted a 131% price gain year to date but still sits 80% below the all-time high from two summers ago.
And I see nothing but better days ahead.
Roku's stalled top-line growth has already restarted with a 20% year-over-year increase in this year's third-quarter report. Both ad sales and hardware revenue saw double-digit-percentage growth. I expect the ad sales to soar in 2024 and 2025, as ad-buying clients recover from the inflationary pressure. Why launch an expensive marketing campaign when nobody is ready to buy what you're selling, right?
At the same time, Roku's stable pricing in an inflation-wracked era helped the company deliver millions of new user accounts across the financial downturn. The company has 75.8 million active accounts now, up from 55.1 million when the stock chart started to droop. This swelling user group gives Roku a strong selling point when negotiating ad-spot rates with potential customers.
Sure, Roku is currently unprofitable on a trailing-12-month basis, making it difficult to measure its worth by price-to-earnings ratios and other profit-based metrics. But the stock trades at merely 3.9 times trailing sales, painting a bargain-bin price tag on a company with an average annual sales growth of 40% across the last five years -- a period that includes the panic of 2022.
I keep pounding the table about Roku as a low-priced stock tied to nitro-powered growth engines, with the global entertainment market firmly in its sights. The fact that this high-octane growth stock is available at such a modest price genuinely surprises me. I've confidently doubled down on my Roku investment several times during this downturn, seeing the current low prices as a unique opportunity.
It's not too late for others to consider this investment. Roku's stock, at its current valuation, appears to be a no-brainer buy. The bottom-line profits are showing signs of a comeback, and I am more than willing to wait for the company to make a complete turnaround. After all, the ideal holding period for any stock is "forever," as the old investment adage goes.
Roku, with its expanding user base and solid market position, seems well poised for long-term growth, making it an intriguing option for patient investors looking for substantial returns in the years to come.
