There are still a few value plays left for the taking.
Interest rates have been historically low for most of the past decade, and growth stocks have led the stock market charge to all-time highs. Unfortunately, many analysts and investors believe the valuations of high-flying stocks have become stretched, and some even say there is a valuation bubble in growth stocks. The Federal Reserve is expected to begin raising interest rates in March, and growth stocks have lagged so far in 2022. Fortunately for growth investors, there are still a handful of value plays among growth stocks. Here are nine undervalued growth stocks to buy, according to Morningstar analysts.
Microsoft Corp. (ticker: MSFT)
Microsoft is the world’s largest software company. Even with a market cap of $2.3 trillion, Microsoft is still putting up impressive growth numbers, including 46% Azure cloud revenue growth and 19% Office 365 revenue growth in the most recent quarter. In January, Microsoft made a major move to boost its Xbox gaming division by acquiring video game developer Activision Blizzard Inc. (ATVI) for $68.7 billion. Analyst Dan Romanoff says Microsoft’s ability to drive both sales growth and margin expansion at scale is extremely impressive. Morningstar has a “buy” rating and $352 fair value estimate for MSFT stock, which closed at $295 on Feb. 14.
Shares of Google and YouTube parent company Alphabet recently got a boost when the company reported fourth-quarter earnings and revenue beats and announced a 20-for-1 stock split. Analyst Ali Mogharabi says Alphabet is demonstrating strength on all fronts, including search advertising, YouTube monetization and cloud services expansion. Mogharabi says Alphabet’s revenue growth will likely slow in 2022, but he expects double-digit growth from cloud services and YouTube will continue. After another year of aggressive cloud investments, Mogharabi says Alphabet will return to margin expansion in 2023. Morningstar has a “buy” rating and $3,600 fair value estimate for GOOGL stock, which closed at $2,710.52 on Feb. 14.
Amazon.com Inc. (AMZN)
E-commerce and cloud services giant Amazon also recently reported better-than-expected fourth-quarter growth numbers. Perhaps the most impressive growth came from Amazon’s advertising business, which grew revenue 32% in the quarter to $9.7 billion. Even after Amazon shares jumped 14% following its earnings report, Romanoff says the growth stock remains undervalued. He says the highlight of Amazon’s report was its announcement that it is raising Prime annual subscription prices from $119 to $139 in the U.S., a move which will help offset rising labor costs. Morningstar has a “buy” rating and $4,100 fair value estimate for AMZN stock, which closed at $3,103.34 on Feb. 14.
Meta Platforms Inc. (FB)
Shares of Facebook and Instagram parent company Meta Platforms are already down 34.5% year to date after Meta reported fourth-quarter earnings and said the company’s metaverse business lost $10 billion in 2021. In addition, Meta said changes to Apple Inc. (AAPL) privacy policies will cost the company $10 billion in revenue in 2022. Despite the negative market reaction, Facebook reported 19.9% revenue growth in the fourth quarter. Trading at less than 17 times forward earnings, Mogharabi says Meta shares are attractively valued for a big tech growth stock. Morningstar has a “buy” rating and $400 fair value estimate for META stock, which closed at $217.70 on Feb. 14.
Walt Disney Co. (DIS)
Walt Disney isn’t the typical high-growth tech stock, but its transition to an over-the-top streaming model has generated impressive growth in recent years. In Disney’s fiscal first quarter, its direct-to-consumer segments, including its Disney+, ESPN+ and Hulu streaming services, generated 34% revenue growth. Analyst Julie Utterback says Disney’s direct-to-consumer segment will continue to drive the company’s long-term growth, and Disney will further expand and monetize its large, valuable subscriber base. In the near-term, Disney’s theme parks will benefit from a rebound in travel and leisure spending. Morningstar has a “buy” rating and $170 fair value estimate for DIS stock, which closed at $150.85 on Feb. 14.
Adobe Inc. (ADBE)
Adobe is a software company that specializes in creative content, marketing automation and e-commerce applications. In the fiscal fourth quarter, Adobe reported 20% revenue growth, including 21% digital media growth and 29% Document Cloud growth. Unfortunately, Adobe shares are down 21% since the beginning of December, but Romanoff says the pullback is a buying opportunity for long-term investors. He says Adobe’s fourth-quarter billings miss was a temporary aberration, the post-earnings sell-off is “overly pessimistic” and the stock is undervalued given Adobe’s expanding portfolio and growing market. Morningstar has a “buy” rating and $630 fair value estimate for ADBE, which closed at $474.01 on Feb. 14.
Salesforce.com Inc. (CRM)
Salesforce.com is a customer relationship management software-as-a-service, or SaaS, cloud computing company. Romanoff says Salesforce shares look extremely attractive from a valuation standpoint after the stock price fell 28% in the past three months, and he says Salesforce is among his top growth-oriented tech stock picks. Romanoff says Salesforce’s business benefited from the rise of remote work during the pandemic, and he expects a permanent transition to a more hybrid work environment will likely continue over the next couple of years. Morningstar has a “buy” rating and $320 fair value estimate for CRM stock, which closed at $206.40 on Feb. 14.
PayPal Holdings Inc. (PYPL)
PayPal is one of the world’s largest digital and mobile payment platforms. Like other tech growth stocks, PayPal shares have struggled recently and are down about 60% in the past year. Analyst Brett Horn says PayPal’s payment volume growth remained strong at 23% in the most recent quarter, and the company expects to add between 15 million and 20 million new accounts in 2022. However, Horn says the end of the pandemic and eBay’s decision to stop using PayPal as its seller payment processor are headwinds in 2022. Morningstar has a “buy” rating and $151 fair value estimate for PYPL stock, which closed at $114.12 on Feb. 14.
ServiceNow Inc. (NOW)
ServiceNow provides SaaS applications used to manage and automate business processes and workflows. ServiceNow is one of Romanoff’s top high-growth tech stocks to buy on the recent dip. As with Salesforce, Romanoff says ServiceNow benefited from the transition to remote work during the pandemic and will play an important role in the shift to hybrid workplaces. He says ServiceNow’s combination of strong, highly visible earnings growth and margin expansion is impressive. In addition, the company’s organic revenue growth sets it apart from competitors relying on acquisitions for growth. Morningstar has a “buy” rating and $700 fair value estimate for NOW stock, which closed at $579.58 on Feb. 14.
9 undervalued growth stocks to buy:
— Microsoft Corp. (MSFT)
— Alphabet Inc. (GOOG, GOOGL)
— Amazon.com Inc. (AMZN)
— Meta Platforms Inc. (FB)
— Walt Disney Co. (DIS)
— Adobe Inc. (ADBE)
— Salesforce.com Inc. (CRM)
— PayPal Holdings Inc. (PYPL)
— ServiceNow Inc. (NOW)
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9 Growth Stocks That Are Undervalued originally appeared on usnews.com
Update 02/15/22: This story was published at an earlier date and has been updated with new information.
