The Covid-19 crisis of 2020 caused the Federal Reserve to step in and inject the economy with trillions of dollars in stimulus. This caused a “sugar rush” in both the economy and the stock market. However, a side effect of this exuberance has been high inflation, which hit 8.3% in September. This was slightly lower than the prior month's rate of 8.5%, but still well above the Fed’s 2% target.
In the words of billionaire investor Warren Buffett (Trades, Portfolio), “Inflation swindles everybody.” It raises the input costs for businesses and devalues cash. To combat this, the Fed hiked its short-term rate by 0.75% in September to a range of between 3% and 3.25%. Higher interest rates mean higher discount rates and, therefore, lower valuations for stocks.
The good news is this interest rate increase has already been baked into the cyclical market. High interest rates will not last forever, so prudent investors can use times of turmoil to load up on cheap growth stocks. In this discussion, I will to dive into two beaten-down technology stocks that are currently trading at cheap valuations relative to history.
Uber
Uber Technologies Inc. (UBER, Financial) is the industry leader in ride-hailing with 69% market share in the U.S. according to Statista. This firmly beats rival Lyft Inc. (LYFT, Financial), which has a market share of just 31%.
The company’s food delivery business, called Uber Eats, exploded in popularity during the pandemic as restaurants around the world shut down their dining rooms. Its ride business is now starting to rebound and the company is in much more diverse position than it was before the pandemic.
As management focused on streamlining the business, it sold off its cash-burning flying car segment, known as Uber Elevate, to Joby Aviation (JOBY, Financial). I believe this was a smart move given the speculation and uncertainty in the industry.
Uber had its initial public offering in 2019 at a price of $41 per share. Since then, the stock has been volatile. It hit a $21 low in 2020 before jumping by 180% to a high of $58 in April 2021.
Since then, the stock has been butchered as economic uncertainty, inflation and rising rates have caused the price to decline about 53%.
Growing financials
Uber generated strong financial results for the second quarter of 2022. Revenue of $8.07 billion beat analysts' estimates by $699 million and was a record quarter.
Gross bookings popped 33% year over year to $29.1 billion, with mobility making up $13.4 billion and delivery contributing $13.9 billion. Its rides business has firmly rebounded with 1.87 billion trips in the second quarter, which increased by 24% year over year.
Further, management has been heavily focused on improving profitability and cutting costs. Its earnings loss of 3 cents per share beat analysts' estimates by 2 cents.
The company also reported solid free cash flow of $382 million, which is a testament to the cost-cutting program.
The main drag for the business currently is the rising interest rate environment, which acted as a catalyst for risk capital to be withdrawn from many speculative growth stocks. Uber has lost an eye-watering $2.6 billion related to the declining prices of Indian delivery giant Zomato, Grab and Aurora.
Uber has a strong liquidity position with $4.4 billion in cash and short-term investments. While the company does have high long-term debt of $9.2 billion, only $262 million of it is current debt that is due within the next two years.
Valuation
Uber trades with a price-sales ratio of 2.13, which is 53.29% cheaper than its five-year average. The company also trades at a mid-range valuation, which is cheaper than DoorDash's (DASH, Financial) price-sales ratio of 3.07.
The GF Value Line indicates a fair value of approximately $65 per share, which means the stock is significantly undervalued at its current price of around $28.
Wall street analysts have a median price target of $47 per share, suggesting an upside of 62%.
During the second quarter, legendary investor George Soros (Trades, Portfolio) invested in Uber. Since the third quarter just ended, no further trades have been released yet by the guru, but keep an eye out.
Qualcomm
Qualcomm Inc. (QCOM, Financial) is a leading semiconductor design company that powers many portable technology devices.
The company'sshare price jumped by an incredible 209% between the lows of 2020 and the highs of 2021. This was driven by the semiconductor shortage, which caused a global price increase in chips. Investors loaded up on semiconductor stocks during that period and, as a result, Qualcomm was a strong winner. However, on the back of rising inflation and increasing interest rates, growth stocks have been decimated.
Qualcomm was among those caught in the crossfire. Its share price slid 37%, but now it offers a potential opportunity for long-term investors.
What does Qualcomm do?
Qualcomm’s flagship semiconductor is called Snapdragon. This is the central processing unit or brains behind many portable electronic devices. Based upon ARM architecture, Snapdragon offers incredible performance with high efficiency. Therefore, it is no surprise that the chip is used in 70% of Samsung's (XKRX:005930, Financial) Galaxy Series. The company recently scored a major contractual partnership with Samsung, which has further cemented this relationship up until 2030.
The company's chips are also used in many automotive electronics applications, internet of things devices and even 5G technology. Qualcomm previously announced a moonshot $700 billion market opportunity across the various technologies. Its chip is also the backbone of many Chinese smartphones and the company even works with Apple Inc. (AAPL, Financial). However, Apple is reportedly planning to make its own modem chips, which will displace the need for Qualcomm.
Growing financials
Qualcomm produced solid financial results for the fiscal third quarter of 2022. Revenue of $10.9 billion popped by a spectacular 37% year over year, which is a real achievement for a company of this scale. The main driver of growth was its CDMA Technology segment, which contributes 86% of the business’ revenue.
Qualcomm’s automotive segment is also a key driver of future growth. This business segment generated $350 million in the recent quarter, which increased 38% year over year. The company has a strong pipeline of design wins worth an estimated $19 billion. Its auto revenue is driven by its Digital Chassis platform, which offers leading automakers best-in-class computing, artificial intelligence and self-driving features. Qualcomm currently has partnerships with 26 global automakers, including BMW (XTER:BMW, Financial) and Volkswagen (XTER:VOW3, Financial).
The company is also extremely profitable and generated strong earnings in the third quarter with earnings of $3.29 per share, beating analysts' estimates by 81 cents per share.
The company has a solid gross margin of 59% and operating margin of 29%, which is extremely strong. To put things into perspective, the average operating margin for a software company is 23% and Qualcomm sells hardware!
Valuation
Qualcomm trades with a forward price-earnings ratio of 9.64, which is 46% cheaper than its five-year average. The company also trades with a price-earnings to growth ratio of 0.42, which is over 60% cheaper than its five-year average.
Relative to other semiconductor companies, Qualcomm trades at a fairly cheap valuation (red line). For example, Nvidia (NVDA, Financial) has a price-earnings ratio of 39 and AMD (AMD, Financial) trades with a price-earnings ratio of 24.
Soros increased his position in the stocy by 49% during the second quarter, loading up on around 230,000 shares.
Final thoughts
Both Uber and Qualcomm are innovative but also very different technology companies.
Uber runs a scale-focused, low-margin business that has major potential, but is also vulnerable to inflation. In comparison, Qualcomm runs a high-margin, niche business that acts as a technology backbone behind many tech devices.
I personally prefer Qualcomm overall since, given the high inflation environment, profitably is essential. In addition, the business has locked in a contract with Samsung until 2030, offering peace of mind for investors.
