Despite the recent sell-off of tech stocks, this sector is still a favorite among investors -- and for good reason. Technology companies are fun and exciting to learn about and follow, and many of their products are consumer-facing favorites of many investors.
In the current higher-interest-rate environment, the price paid for stocks matters more than it has in recent history. With that in mind, there are some stocks that are still trading for reasonable or cheap valuations that present attractive buying opportunities right now. Let's take a look at three of those stocks to see what makes them great buys.
PayPal
For many years, the story of PayPal(NASDAQ: PYPL) was one of expansion, with revenue growth averaging around 17% each quarter. More recently, management decided to prioritize increasing the activity of its existing customers. The recent results show that this may have been a wise decision.
One example is how much more valuable each account has become to PayPal's bottom line. In the first quarter of 2023, active accounts remained relatively stable year over year, while transactions per active account have increased by 13%. This is proof that the focus on driving higher activity levels on existing accounts is paying off.
PayPal has also begun to repurchase its shares more aggressively. Management has reduced shares outstanding by 9% over the past 10 years, but about half of that has happened in the past three years. Combine this with the fact that PayPal trades for the lowest price-to-sales multiple seen in the last decade, and the stock looks very compelling.
DigitalOcean
The leaders in cloud infrastructure are household names. Amazon Web Services (AWS), Alphabet's Google Cloud, and Microsoft's Azure are the clear leaders in the space. However, smaller upstart DigitalOcean(NYSE: DOCN) is not only holding its own, it's growing faster than its tech giant competitors.
DigitalOcean caters to small and medium-sized businesses by offering affordable and transparent pricing as well as substantial customer support. This strategy has been paying off. In Q1 2023, DigitalOcean grew its revenue by 30% year over year, outpacing its competition. For comparison, AWS, Google Cloud, and Azure increased by 16%, 28%, and 27%, respectively.
DigitalOcean is also growing its largest customers even more rapidly than its revenue. Customers that spend more than $50 per month, called "builders and scalers," increased by 43% year over year. These customers now represent 86% of total revenue. This is an important metric to keep an eye on as it is an indicator of how DigitalOcean is able to continue to serve its customers as they grow and scale.
The company has only been on the public markets for a few years, but it's currently trading for valuation multiples below its historical average and not far from its all-time lows.
Endava
Endava(NYSE: DAVA) may not be a household name for investors, but it should be. This IT consulting company has been putting up impressive numbers despite the fact that its stock is down 34% year to date and down 70% from its late 2021 high.
Third-quarter 2023 results, which represent the quarter ending in March, were impressive with revenue and earnings per share increasing by 20% year over year. Endava is also consistently cash flow positive, and it generated a 10% free cash flow margin for the quarter.
Endava has been growing its roster of large customers impressively. The number of clients spending more than 1 million British pounds ($1.24 million) in revenue reached 155 in Q3, an increase of 31% year over year. The overall customer base is also becoming more diversified. Endava's top-10 clients represented 33% of total revenue in Q3, down from 35% in the year-ago quarter.
The stock took a hit after earnings, mostly due to the fact that the company lowered its fiscal 2023 guidance. However, management thinks that slowing revenue from the private equity part of its customer base is a temporary pause due to the fallout relating to the Silicon Valley Bank collapse in March.
Endava trades for three times sales and 25 times earnings, both of which are near all-time lows. With strong results even in the face of some important customers' short-term challenges, the current valuation is compelling for this quickly growing business.
10 stocks we like better than PayPal
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Jeff Santoro has positions in Amazon.com, DigitalOcean, Endava Plc, Microsoft, and PayPal. The Motley Fool has positions in and recommends Alphabet, Amazon.com, DigitalOcean, Endava Plc, Microsoft, and PayPal. The Motley Fool recommends the following options: short June 2023 $67.50 puts on PayPal. The Motley Fool has a disclosure policy.
