A lot of tech stocks have been struggling lately due to rising rates and fear of inflation. This creates an opportunity to buy stocks that are now trading at an undervalued price. Our top 5 undervalued tech stocks to buy for 2022 are Digital Turbine (APPS), Avid Technology (AVID), Pinterest (PINS), Global Payment (GPN), and Kaleyra (KLR).
Digital Turbine (APPS)
Digital Turbine is the leading independent growth and monetization platform in the mobile advertising landscape. The company’s main product Ignite works with carriers like Verizon and OEMs like Samsung to pre-install advertiser’s apps (eg. Uber’s app) into mobile devices allowing them to have a greater customer reach. Their patented SingleTap technology also allows users to download an app straight from the browser without having to leave the web and go to Google Play. This feature is able to boost install ad conversions by 2–5X and improves customer experience which makes Ignite even more attractive.
Ignite is installed in over 600 million devices worldwide and the company announced that Ignite will soon be installed in every Samsung device. Their current customer includes big names like Instagram, TikTok, Snapchat, HBO, and more. To further increase their growth and monetize beyond just app installation from day 1, Digital Turbine acquired Appreciate, a demand-side platform for programmatic advertising, Fyber, a leading mobile ad exchange platform, and AdColony, an in-app video advertising company. By combining the four companies, Digital Turbine is becoming a giant in the mobile advertising industry with a huge total addressable market to expand into.
The company is forecasted to grow 280% this fiscal year and maintain a 30% CAGR going forward. The management team stated during last year’s investors’ day that they are aiming to reach $4 billion and $1 billion EBITDA in the coming years. Given the management team’s track record and the company’s prospects, this is definitely within reach. The current price implies an fwd PE ratio of 23and an fwd PS ratio of 3, this is very cheap given its strong growth and moat with its Ignite platform, therefore we are rating it a buy for 2022.
Avid Technology (AVID)
Avid Technology is a leading editing software company that operates in the video and audio industry. The company works with large media companies like HBO to help produce their videos and movies. It differentiates itself from companies like Adobe which focuses on the mid to low market. The company had been around for a long time but its stock started to take off after the company decided to transform from a legacy licensing company to a SaaS (software as a service) company in 2018.
The company had made substantial progress and we believe the company is still undervalued. In the latest quarter, its subscription revenue grew 56.4% year over year while its total revenue grew 12.4%. The rise in subscription revenue significantly increased its gross margins which increased from 56% in 2018 to 64% this year. Subscription revenue still only accounts for around 30% of its total revenue which gives the company room for further growth and margin expansion. As subscription revenue grows, the company’s financials and cash flows become a lot more stabilized as a chunk of its revenue is now recurring.
The company is also benefiting from the tailwind where streaming companies like Netflix, HBO, and Disney are fighting to earn subscribers by putting out more content. This means usage of Avid’s software will increase further and the trend is unlikely to stop anytime soon. At the current price Avid is trading at an fwd PE ratio of 19.3 while forecasted to grow at 23% this year. We believe the current price is attractive as the company is improving its bottom line significantly while facing tailwinds which will help the company to further grow going onwards.
Pinterest is a social media company that allows users to share and discover ideas through pictures and videos. The company is one of the biggest social media in the world with global monthly active users of over 440 million. This is largely helped by the pandemic where a lot of people turned to Pinterest to find ideas like cooking recipes, knitting patterns and etc as they are stuck at home. However, as the pandemic starts to ease and trends start to normalize, its monthly active users stopped growing which worried investors and the stock dropped 60% from its all-time high.
We believe the company is oversold and may rebound strongly in 2022. Instead of focusing on monthly active users which stayed stagnant, the company’s ARPU (average revenue per user) saw an increase of 37% with international ARPU up 81%. This resulted in a 43% increase in total revenue and adjusted EBITDA increased by 117%. We think ARPU is a better KPI (key performing index) going forward, as it is able to show the capability of the company at monetizing its users. I
n order to further improve engagement which usually leads to higher ARPU, Pinterest introduced new features such as Pinterest TV, a live, original shippable show from creators. It also recently acquired Vochi, a creation, and editing app to further enhance the capability of its app. The advertising budget will also benefit from the increasing traveling industry’s ad spend as countries start to reopen. With the company trading at an fwd 22 PE ratio of 22, we think it is a buy as its strong ARPU growth is likely to further drive revenue upwards even if MAU stays stagnant over time
Global Payment (GPN)
Global Payments is a payment company that provides payment technology and services to merchants, issuers, and consumers. The company works with companies like Burger King, Starbucks, etc to allow payment from POS (point of sale), mobile, and online. It also handles authorization, and settlements and provides data insight for companies. Instead of competing with credit and debit cards, it benefits from them as it charges a processing fee every time a customer pays with it. The increasing usage of credit cards due to the pandemic has greatly benefitted the company. Also to adopt the latest BNPL (buy now pay later) trend, the company has also introduced its own BNPL solutions for business.
We like the stock for 2022 because it will benefit from inflation and countries’ reopening. The company is relatively immune to inflation as its main revenue is from processing fees, this means if the average transaction volume increases then so do Global Payments’ revenue. Besides as countries reopen, travel spending will increase and people will also go out more which greatly benefits the revenue generated from its POS system. In a fintech sector where Visa and Mastercard both trade at around 30 PE, Global Payments trades at 14 PE which is a steep discount. The company is showing no sign of weakness and is forecasted to grow its bottom line in double digits till 2024. We believe the current price is a good buying point as it is trading at a very compelling valuation while having strong fundamentals.
Kaleyra is a company that provides mobile communication services for enterprises across the world. It helps businesses communicate with customers through different channels such as SMS, Whatsapp, E-mail, and more. It is classified as a CPaaS (Communications Platform as a Service) company. The CPaaS market for Kaleyra is projected to grow 30% cagr for the coming few years according to their CEO as more and more companies are finding ways to effectively communicate with customers which will provide tailwinds for the company.
The company is going through a transformation with its latest acquisition of mGage, an enterprise messaging provider. This acquisition is able to increase Kaleyra’s margin by a wide percentage while expanding its customer base to more countries such as the US. The company also recently acquired Bandyer, a company that offers cloud-based audio/video communications services. This further expands Kaleyra’s product catalog and capabilities, audio, and video communication service. This is highly lucrative for their bottom line as audio and video products have much higher margins compared to SMS products. It also launched apps on Shopify and Salesforce marketplaces, connecting the Company’s CPaaS channels to a potential addressable market of over one million users.
We believe the company will do great in 2022 as its acquisitions start to synergize. The company is already seeing synergies as last quarter’s revenue grew 102% year over year (30% organic revenue growth) and gross profit grew 169% year over year with a dollar-based net expansion rate of 124%. Amid the tech sell-off, Kaleyra is now trading at an fwd 22 PS (price to sales) ratio of 0.51 while forecasted to grow 50% in revenue. This is a very attractive entry point that could possibly provide a substantial return in the coming years.
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