When people say that a stock looks cheap, it could mean a few different things. Today, I'll show you three examples of what people mean by "cheap stocks" in the tech sector, with one common quality -- these stocks are affordable in a good way, and they should be on your short list for further research if you're in a share-buying mood.
Block: Modest valuation for a growth stock
Let's start with Block (SQ 0.44%), a well-known provider of financial services with a modern twist.
The stock comes with a market cap of $40.7 billion and trades at lofty valuation ratios such as 51 times trailing earnings and 75 times free cash flow. But those ratios don't tell the whole story, because Block is also a high-octane growth stock.
The company has increased its revenue at a compound annual growth rate (CAGR) of 51% over the last five years. Trailing earnings are up by 91% year-over-year. Your average analyst expects this earnings jump to be followed by a 28% CAGR in the next half-decade. Credit card processors like Visa (V 0.08%) or Mastercard (MA 0.08%) can't keep up with any of these growth metrics. Even digital payment services peer PayPal (PYPL -0.12%) looks sluggish by comparison.
And when you choose valuation metrics that factor expected growth into the equation, Block stock suddenly looks incredibly affordable. Shares are changing hands at 15 times forward earnings estimates. And its price to earnings to growth (PEG) ratio is a modest 0.81 -- below PayPal's 0.85 and much lower than Mastercard's 1.9 or Visa's 2.3. A value near 1.0 indicates a reasonable valuation, and lower scores make the stock more affordable.
In other words, Block's rapid business growth is leaving many investors and analysts flat-footed. Block's stock gives you exposure to innovative payment services and business tools, with a dash of cryptocurrency expertise as the company holds Bitcoin (BTC 0.98%) worth $470 million at today's prices. The stock may look pricey in terms of traditional value ratios, but it's cheap when you account for Block's tremendous business growth.
Roku: Way down from earlier highs
Then there's Roku (ROKU -0.10%), a veteran of media-streaming technology and services.
This stock isn't on this list because of a low valuation ratio. Roku is currently unprofitable in terms of bottom-line earnings and pre-tax operating income. Its free cash flows are back in the black after a dip into red-ink territory in 2022 and 2023, but Roku shares are no bargain compared to its cash profits, either.
So how did it end up on my list of low-priced tech stocks? You see, this stock has fallen 44% since last November and 87% from the all-time highs of July 2021. A price correction was probably in order from the earlier peak, but this plunge is going too far.
Roku is a leading name in a high-growth industry with a global business opportunity. It's a big market with lots of future expansion left. More than 40% of potential users are subscribed to streaming services in mature markets like North America and Western Europe, according to Statista. Developing nations such as Indonesia and India haven't even passed the 10% level. In other words, most of the world is still getting used to online streaming services, and Roku benefits as the adoption of these services grows.
Meanwhile, Roku's stock is priced for absolute disaster. Yes, the profit metrics are modest at best and negative in many cases, but the company is doing better over time. The uptrend should continue as Roku's global footprint expands and the digital advertising sector firms up after a few years of inflation-burdened doldrums. In a couple of years, it should make sense to talk about Roku's profit-based metrics again.
I mean, do these healthy financial lines belong in the same chart as Roku's crashing stock price? I don't think they do:
ROKU Revenue (TTM) data by YCharts
So Roku may not be low-priced in most senses of that expression, but I see it as a deeply misunderstood growth story that deserves a richer valuation. It could take years before it revisits the lofty heights of 2021, and that's all right. Roku's stock is a direct bet on the long-term future of media-streaming services, and you don't even have to pick a winning content platform.
SoundHound AI: Rock-solid financial foundation
Finally, you should consider voice controls specialist SoundHound AI (SOUN 19.71%). With a uniquely capable voice interpretation technology and a growing list of household-name clients, I'm looking at another long-term growth story that isn't getting the market love it deserves.
Like Roku, SoundHound AI is unprofitable at the moment. Also like Roku, this company is delivering stellar revenue growth. Trailing sales have nearly tripled in two years. And it's easy to miss how robust SoundHound AI's financial foundation is.
The backlog of order bookings and future sales in subscription-style contracts currently stands at $723 million, up 113% from the year-ago period. That's a lot of guaranteed revenue for a company currently reporting about $55 million of annual sales. And the backlog balance keeps skyrocketing as the company adds more customers with long-term contracts.
Moreover, SoundHound AI's balance sheet is nearly debt-free, with a cool $200 million in cash reserves.
I understand if you walk away after taking one look at SoundHound AI's negative profits and soaring price-to-sales ratio. That might be a mistake, though. The stock is modestly priced when you account for its generous (and growing) order backlog, not to mention that rock-steady balance sheet. This little company is prepared to soar in the long haul.
