The 2022 market weakness has created some value opportunities among growth stocks.
Interest rates were historically low for most of the past decade, and growth stocks led the market’s charge to new all-time highs. Unfortunately for growth stock investors, the Federal Reserve has been forced to aggressively raise interest rates in 2022 to combat inflation, and higher rates have triggered a rotation out of growth stocks. The good news for investors is that there are now opportunities to buy high-quality growth stocks at attractive valuations. Analysts say these top stocks can continue growing their revenues even as interest rates climb. 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 trillion, Microsoft is still putting up impressive growth numbers, including 40% Azure cloud revenue growth and 20% Intelligent Cloud revenue growth in the most recent quarter. In January, Microsoft also made a major move to boost its Xbox gaming division, announcing its planned acquisition of video game developer Activision Blizzard Inc. (ATVI) for $68.7 billion. Analyst Dan Romanoff says Azure is growing at a stunningly high rate for a $45 billion business. Morningstar has a “buy” rating and $352 fair value estimate for MSFT stock, which closed at $268.09 on Aug. 26.
Amazon.com Inc. (AMZN)
E-commerce and cloud services giant Amazon recently reported better-than-expected second-quarter growth numbers. Perhaps the most impressive growth came from Amazon’s AWS cloud business, which grew revenue 33% in the quarter to $19.7 billion. Amazon shares are down 21.6% this year through Aug. 26, but Romanoff says Amazon is finally moving past its difficult year-over-year comparisons from 2021, setting the company up for better growth optics in the second half of the year. He says Amazon is a top stock pick and benefits from numerous size and scale advantages. Morningstar has a “buy” rating and $192 fair value estimate for AMZN stock, which closed at $130.75 on Aug. 26.
Berkshire Hathaway Inc. (BRK.B)
Berkshire Hathaway CEO Warren Buffett is known for his value investing, not his growth stock investing. However, analyst Greggory Warren says Berkshire offers investors the best of both worlds. Warren says Berkshire’s ability to consistently deliver at least high-single-digit book value per share growth in virtually any economic climate is impressive, and the eventual departure of Buffett and Vice chairman Charlie Munger will not have a major impact on Berkshire’s future operations. Warren says Berkshire’s diversification and cash flow differentiate it as a top-tier investment. Morningstar has a “buy” rating and $357 fair value estimate for BRK.B stock, which closed at $289.96 on Aug. 26.
ASML Holding NV (ASML)
ASML is one of the world’s largest manufacturers of semiconductor equipment. Even amid global semiconductor supply chain disruptions, ASML reported 35% revenue growth in the second quarter and guided for 10% revenue growth in 2022. Analyst Abhinav Davuluri says nearly $2.8 billion in revenue will be deferred to 2023, potentially boosting next year’s growth numbers once supply chain issues subside. While wafer fab equipment spending may weaken in coming quarters, Davuluri says lithography tool demand should remain resilient even if the semiconductor market experiences a downturn. Morningstar has a “buy” rating and $761 fair value estimate for ASML stock, which closed at $509.94 on Aug. 26.
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 third quarter, its direct-to-consumer segments, including its Disney+, ESPN+ and Hulu streaming services, generated 19% revenue growth. Analyst Julie Utterback says Disney has already caught up to Netflix Inc. (NFLX) in total streaming subscribers, and its parks business continues to rebound from the pandemic. Utterback says parks segment revenues will also get a boost from China once its COVID-19 shutdowns are over. Morningstar has a “buy” rating and $170 fair value estimate for DIS stock, which closed at $114.07 on Aug. 26.
Adobe Inc. (ADBE)
Adobe is a software company that specializes in creative content, marketing automation and e-commerce applications. In the fiscal second quarter, Adobe reported 14% revenue growth, including 15% digital media growth and 27% Document Cloud growth. Unfortunately, Adobe shares are down 42% since the beginning of December 2021, but Romanoff says the company has healthy underlying fundamentals and the sell-off is a buying opportunity. He says Adobe dominates the content software market and has the most comprehensive portfolio of products in print, digital and video content creation. Morningstar has a “buy” rating and $500 fair value estimate for ADBE stock, which closed at $381.02 on Aug. 26.
Salesforce Inc. (CRM)
Salesforce is a customer relationship management software-as-a-service cloud computing company. Salesforce recently cut its fiscal 2023 sales and earnings guidance, but the company still reported 22% revenue growth in the second quarter. Romanoff says Salesforce’s demand environment is solid, and its product pipeline is encouraging. The company is focused on front-office digital transformation, which Romanoff says is a “sweet spot” for Salesforce. In addition, the company recently announced its first-ever $10 billion stock buyback program, and Romanoff says it is a top software stock pick. Morningstar has a “buy” rating and $240 fair value estimate for CRM stock, which closed at $165.23 on Aug. 26.
Advanced Micro Devices Inc. (AMD)
Advanced Micro Devices is one of the largest semiconductor companies, supplying microprocessors and graphics chips for computers and servers. AMD continues to put up extremely impressive growth numbers in a difficult semiconductor market, including 70% revenue growth and 83% data center sales growth in the second quarter. Gaming segment revenue was also up 32%, while PC and laptop chip sales were up 25%. AMD management also reiterated its full-year revenue growth guidance of 60%, and Davuluri says AMD remains an attractively valued market share gainer for long-term investors. Morningstar has a “buy” rating and $130 fair value estimate for AMD stock, which closed at $91.18 on Aug. 26.
Blackstone Inc. (BX)
Blackstone is an alternative-asset manager that specializes in raising and investing capital and providing financial advisory services. Warren says Blackstone has enjoyed a “golden era of growth” in the alternative asset management market over the past decade. He says the next decade also looks promising for Blackstone given that interest in alternative assets remains high among high-net-worth individuals. In addition, Warren says Blackstone and other alternative asset managers will likely eventually figure out ways to expand their products and services to retail customers as well. Morningstar has a “buy” rating and $125 fair value estimate for BX stock, which closed at $98.55 on Aug. 26.
9 undervalued growth stocks to buy:
— Microsoft Corp. (MSFT)
— Amazon.com Inc. (AMZN)
— Berkshire Hathaway Inc. (BRK.B)
— ASML Holding NV (ASML)
— Walt Disney Co. (DIS)
— Adobe Inc. (ADBE)
— Salesforce Inc. (CRM)
— Advanced Micro Devices Inc. (AMD)
— Blackstone Inc. (BX)
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Update 08/29/22: This story was published at an earlier date and has been updated with new information.