The stock market has gotten off to a solid start in 2024 with the S&P 500 index already up by close to 8% and setting new highs, and the good part is that the market could keep rising thanks to a strong U.S. economy and receding inflation.
Technology stocks, in particular, could have another solid year on the back of catalysts such as artificial intelligence (AI). It is worth noting that the Nasdaq-100 Technology Sector index has jumped by more than 62% in the past year, so it may be difficult to find bargains in this sector. But if you have $1,000 to spare after paying your bills, saving enough for a rainy day, and paying off high-interest debt, you may want to use that investible cash to buy one share of each of these two tech companies that look like solid buys right now based on their long-term prospects.
1. Twilio
Cloud communications specialist Twilio (TWLO 1.47%) may look like a surprising buy recommendation considering that it has underperformed the stock market in the past year, losing 18% of its value. There was more bad news for Twilio investors when the company released its fourth-quarter results last month.
Though it beat expectations for the quarter and its revenue for the year rose 9% to $4.15 billion, management failed to provide full-year guidance for 2024. The company is carrying out an operational review of its customer data platform business, known as Segment, and says it plans to issue the 2024 guidance this month once that review is complete.
However, a closer look at Twilio's guidance for the current quarter indicates that this is going to be a difficult year for the company. It expects just 2% to 3% revenue growth in the quarter to $1.03 billion. Twilio has also guided for adjusted earnings of $0.58 per share at the midpoint, which would be a 23% jump from the prior-year period. For comparison, Twilio's full-year earnings increased to $2.45 per share in 2023 from just $0.15 per share in 2022, driven mainly by its cost-cutting moves.
The relatively slower growth forecast for 2024 explains why some investors have been selling Twilio stock. As a result, it can now be bought for just 2.7 times sales, which is well below its five-year average sales multiple of 6.5. Additionally, Twilio is trading at 24 times forward earnings right now, which makes it cheaper than the Nasdaq-100's forward earnings multiple of 30 (using the index as a proxy for the tech sector).
Buying Twilio at these multiples could turn out to be a smart long-term move. That's because the company's slowdown is likely to be temporary considering the communications-platform-as-a-service (CPaaS) industry that it operates in. Twilio's application programming interfaces (APIs) allow companies to build voice, messaging, and video applications to remain connected with their customers. This allows organizations to do without old-school physical call centers, which require a lot of initial investment.
As of October 2023, Synergy Research Group describes Twilio as the leading player in CPaaS with a 37% market share. Meanwhile, as of June 2023, market research firm IDC estimates that Twilio controls nearly a quarter of this market. IDC further adds that "despite the setbacks of slowing sales cycles, restructuring, and downsizing, the industry is still one of the strongest IT sectors with attainable double-digit and profitable growth in reach of many companies."
This explains why the CPaaS market is predicted to generate almost $30 billion in revenue in 2026 compared to $14 billion in 2022. As such, it won't be surprising to see Twilio's growth pick up once again in the next couple of years. And, if the company continues to control a quarter of the CPaaS market in 2026, its revenue could increase to $7.5 billion based on IDC's forecast.
That would translate into a three-year revenue compound annual growth rate of nearly 22% based on Twilio's 2023 revenue. If Twilio maintains its current price-to-sales ratio of 2.7, its market cap could increase to $20 billion in the next three years. That would be a nice jump from the current level of almost $11 billion.
2. Nvidia
Nvidia (NVDA 6.18%) may seem like another surprising pick for investors on the hunt for bargain stocks. It trades at 33 times sales and 69 times trailing earnings following its 244% stock surge in the past year. By those measures, it looks pricey. However, Nvidia's forward multiples tell a different story.
NVDA PE Ratio (Forward) data by YCharts.
As the chart above indicates, Nvidia's forward earnings and sales multiples have come down rapidly of late. That's not surprising, as the company's top and bottom lines are predicted to rise sharply this year. Analysts expect Nvidia's earnings to jump to $24.43 per share in fiscal 2025 from $12.96 per share in fiscal 2024, which ended Jan. 28. Its top line is forecast to increase almost 80% to $109.5 billion.
More importantly, Nvidia seems capable of sustaining these impressive growth rates beyond 2024. Analyst Vijay Rakesh of Japanese investment bank Mizuho estimates that Nvidia could generate $300 billion in revenue from AI chips by 2027. That would be a massive increase over the $47.5 billion revenue that it generated from its data center business last year by selling AI chips, which was a handsome 217% increase from the prior year.
There are a few reasons why it wouldn't be absurd to see Nvidia's revenue grow at such a breathtaking pace over the next three years. First, Nvidia's peer AMD has forecast that the global AI chip market will generate $400 billion in annual revenue by 2027. Second, Nvidia is in a nice position to make the most of this opportunity as it reportedly commands a whopping 90% of this market.
Also, Nvidia's efforts to move into additional niches of the AI chip market could eventually help it get close to the ambitious revenue target that Mizuho has set for it. All this indicates that Nvidia could turn out to be a top growth stock in 2024 and beyond, and its low forward multiples mean that investors are getting a good deal on it right now.
Another thing worth noting here is that Nvidia has justified its valuation in the past year by clocking stunning earnings growth that has outpaced the growth in its price-to-earnings ratio.
NVDA PE Ratio (Forward) data by YCharts.
As such, Nvidia stock looks like a bargain considering the potential growth on offer, which is why savvy investors should consider buying it before it moves higher.
