The Magnificent Seven are some of the most dominant and profitable businesses in the world. But these stocks command high valuations and multitrillion-dollar market caps. Investors looking for tomorrow’s standout performers should look for more reasonably valued companies.
Micron Technology (NASDAQ: MU) and Tencent (OTC: TCEHY) are two leading tech companies that are starting to see improving growth. Importantly, these two stocks trade at bargain price-to-earnings (P/E) ratios that could lead to superior returns over the next few years. Let’s find out more about them.
1. Micron Technology
Micron is a leading supplier of memory and solid-state storage solutions and is seeing a strong rebound in revenue and earnings. Investors anticipate a recovery, which helped push the stock up 91% over the last year. But the stock still trades at a low forward P/E that undervalues the tremendous demand starting to come from AI servers.
Micron reported a revenue increase of 57% year over year and an increase of 23% over the previous quarter. The company supplies products for smartphones and PCs, but the demand coming from artificial intelligence (AI) servers is coming in stronger than expected.
A key factor in analyzing Micron’s business is the supply and demand for memory products, which are susceptible to price swings that can impact revenue and profitability. On that note, the demand from AI servers is causing a ripple across the memory market that is tightening supply and pushing up prices. As a result, Micron turned a year-ago loss into a profit last quarter.
Micron sees the overall demand for servers getting stronger in the second half of calendar 2024. This means Micron is positioned for a full year of data center growth in 2025.
While the stock is hitting new highs, it still trades at a low forward P/E ratio of 7 based on Wall Street’s earnings estimates this year. Keep in mind, Micron has historically traded at a low P/E due to the cyclical nature of its business, but it is clearly going to be a beneficiary of the AI spending increase by data centers over the next year. The upswing in demand that is underway spells more upside.
2. Tencent
A slow economy in China has weighed on shares of leading internet companies. Tencent is no exception. Sluggish revenue growth has sent the stock tumbling well off its previous peak, but this is an incredibly profitable business with leading positions in video games and entertainment offerings. It won’t stay down long.
Tencent is already turning the corner. Total revenue grew 7% year over year in the last quarter. While revenues from its social networks and games were slightly down, double-digit growth from online advertising and fintech services was responsible for the year-over-year revenue increase.
Importantly, Tencent’s operating profit soared 35% year over year. Management’s effort to keep costs down and squeeze more profit out of the business is a catalyst for the stock.
Tencent is in the business of providing consumer services that reach a large base of users, which it monetizes through subscriptions, advertising, or in-app purchases. Its $24 billion in free cash flow reflects not only a lucrative strategy but also how popular its games and entertainment offerings are in China. Its WeChat app reaches over 1.3 billion monthly active users.
The shares trade at a price-to-free cash flow ratio of 16.7 — a bargain for a leading tech and entertainment company. Management seems to believe so, too. The company has doubled its share repurchases over the last year.
Given Tencent’s leading market position in gaming, mobile payments, and entertainment services, and its growing free cash flows, investors should expect the stock to be worth a lot more in five years.
Should you invest $1,000 in Micron Technology right now?
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John Ballard has positions in Tencent. The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.
Forget the “Magnificent Seven.” Here Are 2 Unbelievably Cheap Tech Stocks to Buy Hand Over Fist. was originally published by The Motley Fool
