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The tech sector is full of high-growth companies that are outperforming the market and benefiting long-term investors. But the problem with consistently outperforming is that valuations can become frothy for new investors.
for example, super microcomputer (NASDAQ:SMCI) was a bargain at one point last year, trading at a P/E of 16x. It seems like every investor knows about that AI stock by now. The stock price has increased about 300% since the beginning of the year, and the forward P/E ratio is 37 times.
Some investors will argue that SMCI stock is significantly overvalued, while others will argue that the stock still has plenty of room to play. One thing is clear, though: it's not the same bargain it was a few months ago.
It's still possible to find undervalued tech stocks, and these three stocks stand out.
Alphabet (GOOG, GOOGL)
alphabet (NASDAQ:googleNasdaq:GoogleThis fact shows how frustrated investors are with the company's recent artificial intelligence failures.
Bird and Gemini have endured high-profile mishaps that have left Alphabet behind and spooked investors. microsoft (NASDAQ:MSFT) in AI races. Alphabet has some catching up to do, but it arguably has more data than any other company.
Alphabet knows what we search for, the content we engage with, and the websites we visit. When you create a Google Account, we know your age, gender, and other details. Many people rely on Alphabet for Google Search, YouTube, Google Cloud, Gmail, Google Docs, and various tools.
A company's success in many areas does not guarantee its future success as a stock. However, Alphabet has an attractive P/E ratio of 24x and solid financial growth. The company reported a 13% year-over-year increase in revenue for the fourth quarter of 2023. Profit increased 52% year over year due to cost reductions and improved profitability. As a result, the net profit margin was 24.0%.
These types of results appear to be more common. If Alphabet releases more earnings reports like this one, the AI failures will be in the rearview mirror.
Perion (PERI)
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Perion (NASDAQ:Peri) is a small advertising company well-positioned in several high-growth advertising segments. The company is involved in connected TV advertising, digital out-of-home advertising, and other channels.
Investors are concerned that the partnership with Microsoft is set to expire this year. It is expected to be updated in late October or early November, but if it is not updated, it could affect nearly half of the company's revenue. Another concern was the year-over-year decline in display advertising revenue.
Fourth-quarter revenue increased 11.7% year-over-year, but net income only increased slightly by 1.9% year-over-year. This isn't the best growth rate, especially for investors who have been tracking the stock for years. Perion has typically achieved year-over-year revenue and net income growth of more than 20%, but that growth rate is slowing.
But looking at its current valuation, Pelion looks like a bargain. The stock trades at a P/E ratio of 9x and a PEG ratio of just 0.34x. The stock's valuation looks even more attractive given that the company has more than $400 million in cash, cash equivalents, and short-term bank deposits. The company's market capitalization is $1.1 billion. Most of its value is backed by cash. Investors were hoping for more growth in the fourth quarter, and the company has a long history of revenue and profit growth.
Fortinet (FTNT)
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fortinet (NASDAQ:FTNT) is one of the best value cybersecurity stocks with growth potential and a P/E of 49x. Although headwinds have hit the company hard, the company has taken a step in the right direction with 10.3% year-over-year revenue growth in Q4 2023.
Net profit decreased slightly year-on-year, but profit margin remained above 20%. Fortinet has a history of increasing revenue by more than 30% year over year while expanding margins. That's why investors aren't too excited about the company's recent financials.
Guidance for fiscal year 2024 suggests revenue growth will be below 10% for the year. Investors will have to wait a bit for this stock to turn things around. This stock may be worth monitoring rather than buying right away. Trading covered calls could offer some upside as the growth story gets back on track.
If tailwinds return to Fortinet, it could rise significantly. The company's stock has outperformed the stock market for some time, rising 339% over the past five years. The cybersecurity giant's current breather could be a long-term buying opportunity.
On the date of publication, Mark Guberti held long positions in GOOG and PERI. The opinions expressed in this article are those of the writer and are influenced by InvestorPlace.com. Publication guidelines.
