The S&P 500 and Nasdaq Composite recently hit their all-time highs as investors cheered the prospects of stabilizing interest rates. The market’s insatiable appetite for high-growth AI stocks and a “fear of missing out” amplified those gains.
As the bull market continues, it might seem difficult to find cheap stocks that still have a lot of upside potential. However, I believe these three oft-overlooked stocks — Magnite (MGNI 1.75%), DigitalOcean (DOCN 1.27%), and Qualcomm (QCOM 3.36%) — are still screaming bargains right now.
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1. Magnite
Magnite is an ad tech company created by the merger of The Rubicon Project and Telaria in 2020. It subsequently acquired several other companies to become the world’s largest independent sell-side platform (SSP) for digital ads.
SSPs help publishers manage and sell their own ad inventories, and they shouldn’t be confused with demand-side platforms (DSPs) that sell the actual advertising space. Digital advertising giants like Alphabet‘s Google bundle together SSPs, DSPs, and other advertising tools, but independent SSPs and DSPs encourage companies to buy and sell ads across the “open internet,” which isn’t locked into the “walled gardens” of tech giants like Google.
Magnite suffered a slowdown over the past year as its connected-TV business, which previously drove most of its growth, cooled off in a challenging macro environment. In 2023, its revenue rose only 7% as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) dipped 4%. But from 2023 to 2026, analysts expect its revenue to rise at a compound annual growth rate (CAGR) of 12% as its adjusted EBITDA grows at a CAGR of 14%.
Those are robust growth rates for a stock that trades at just 3 times this year’s adjusted EBITDA. If you believe Magnite’s business will stabilize as the macro environment warms up, then its stock looks deeply undervalued.
2. DigitalOcean
DigitalOcean is a cloud infrastructure service provider. But unlike larger cloud infrastructure platforms such as Amazon Web Services and Google Cloud, which mainly serve larger enterprise customers, DigitalOcean carves out cheaper “droplets” of individual servers for smaller businesses. Its recent acquisition of the cloud startup Paperspace last year also added GPU-powered AI processing services to its servers.
Like many of its peers, DigitalOcean struggled as many companies reined in their software spending to cope with the macro headwinds. But in 2023, its revenue still rose 20%, its number of customers grew 5%, and its average revenue per user rose 10%. Its higher-value customers who pay at least $50 a month also accounted for 86% of its full-year revenue. Its adjusted EBITDA margin expanded six percentage points to 40% in 2023.
The company is bracing for tougher macro headwinds and a near-term slowdown in 2024, but analysts still expect its revenue and adjusted EBITDA to both grow at a CAGR of 13% from 2023 to 2026. Based on those expectations, DigitalOcean’s stock looks like a bargain at 15 times this year’s adjusted EBITDA.
3. Qualcomm
Qualcomm is one of the world’s largest producers of mobile systems on chips, which bundle together CPUs, GPUs, and baseband modems for smartphones. It also sells standalone baseband modems to Apple and other companies, and it’s gradually expanding its portfolio of Internet of Things (IoT) and automotive chips. Its wireless licensing business also takes a cut of every smartphone sold worldwide, even if they don’t use Qualcomm’s chips.
Qualcomm’s revenue and adjusted earnings per share declined 19% and 33%, respectively, in fiscal 2023, which ended last September. That slowdown was caused by the end of the 5G upgrade cycle, the sluggish growth of the Chinese smartphone market, and its weak sales of industrial IoT chips. Its strong sales of automotive chips failed to offset all of those headwinds.
On the bright side, analysts expect Qualcomm to return to growth in fiscal 2024 as those headwinds dissipate. Looking further ahead, the analysts expect Qualcomm’s revenue and earnings to grow at a steady CAGR of 7% and 14%, respectively, as the smartphone market stabilizes and it expands its automotive and IoT businesses. Its stock still looks cheap relative to those estimates at 17 times forward earnings — and it pays a decent forward dividend yield of 2%.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon, Apple, Magnite, and Qualcomm. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, DigitalOcean, Magnite, and Qualcomm. The Motley Fool has a disclosure policy.
