2 cheap tech stocks to buy right now
TTo buy stock in a growing, tech-driven company, investors usually have to pay a pretty dime out of the company’s profits. While many of these large companies often deserve the premium multiples the market gives them, M. Market occasionally gives out some discounts as well.
Whether it’s due to a few bad quarters, dismal projections, or a number of other causes, from time to time stocks can grow disconnected from the future earnings of the underlying companies. Drop box (NASDAQ: DBX) and Nintendo (OTC: NTDOY) are two technological stocks that fit this mold today.
Image source: Getty Images
Dropbox, the popular file sharing and content collaboration platform, allows users to securely upload files, share and sign documents, collaborate on projects, and more.
As with many file storage services, Dropbox users are pretty clingy. Transferring documents and getting used to a new system can be a bit of a hassle. Not to mention that it can disrupt the workflow as teams often collaborate on projects simultaneously now. The high friction of the replacement process helped Dropbox generate a net revenue retention rate north of 90% and allowed the company to increase its average revenue per user (ARPU) by 5% compared to the last year.
Between the increase in ARPU and the 8% growth in its users, the company is currently on track to generate more than $ 2.1 billion in annual recurring revenue, an increase of 13% from the same. period a year ago. But it’s not just income growth that should get investors excited. Dropbox is taking several steps to increase its free cash flow per share at an even faster rate.
In February 2021, the board of directors approved a billion dollar share buyback program. Back then, that was over 10% of the company’s market capitalization, and today it equates to around 8%. With this action, shareholders should see a greater percentage of the company’s profits going to them.
Additionally, the pandemic has helped inspire Dropbox to scale up its operations. In January, management made the difficult decision to downsize by 11% and followed by a commitment from the company to focus on remote work.
With strong revenue growth, the strong buyout program, and lower operating costs, Dropbox expects it can reach $ 1 billion in free cash flow (FCF) by 2024, a 104% increase from in the last exercise. That’s a lot of growth for a company that trades at a price of 21 times the FCF over 12 months.
Image source: Getty Images.
Nintendo has been a mainstay of the video game industry for about 50 years. But it was only recently that the company finally brought together all of its experience and strengths.
In March 2017, Nintendo released the best-selling console of the past three years, the Nintendo Switch. It combines the convenience of a portable console with the advantages of a fixed console. However, unlike previous Nintendo consoles, Switch user accounts are no longer tied to specific hardware. Instead, by introducing Nintendo Online, users can save their data in the cloud and access digital games downloaded on newer versions of the platform, like the Switch Lite.
This online focus has made it easier for customers to upgrade to new Switch iterations. It has helped Nintendo sell nearly 85 million units since the Switch launched, and is expected to sell an additional 29 million this year. Combining this massive installed base with the company’s portfolio of world-renowned brands such as Mario, Zelda, and Pokemon (of which Nintendo owns at least 33%) has helped the company generate solid profit growth through increased game sales. Since 2017, Nintendo’s annual operating profits have grown more than 20-fold, reaching a record high of $ 5.8 billion in its most recent fiscal year!
However, despite this remarkable growth, the stock is currently trading at a price / operating income multiple of 12 times. This is well below the assessment of play peers such as Activision Blizzard and Electronic arts.
While there are always a number of factors that can cause stock prices to fall, concerns about cyclicality seem to be bogged down by Nintendo. Management doesn’t fight much either, as they continue to provide ultra-conservative guidance despite consistently exceeding their own expectations.
Yet even if management’s estimates for 2021 turn out to be correct and the number of new consoles sold declines over the next year, the path to greater long-term profits is still clear. As more households adopt different versions of the Switch console, game development will become more profitable as the company will have a larger customer base to sell. And game purchases are becoming increasingly digital, which should also lower distribution costs.
If Nintendo’s track record of earnings growth persists, the current share price will look pretty cheap in hindsight.
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Ryan henderson owns shares of Activision Blizzard, Dropbox, Inc., Electronic Arts and Nintendo. The Motley Fool owns shares and recommends Activision Blizzard. The Motley Fool recommends Electronic Arts and Nintendo. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.