At first glance, high valuations may seem part and parcel to investing in technology stocks, but there are plenty of names in the sector that can be described as undervalued tech stocks. Yes, many of them are “cheap for a reason,” aka potential value traps.
A prime example of this would be among the “dinosaur” legacy technology companies, like Xerox (NYSE:XRX). XRX is cheap, at a valuation of just 5.3 times forward earnings. However, the company remains mired in a growth slump. As analysts at Citi recently argued, there’s little hope in the company’s latest restructuring efforts helping to fully fix the situation.
However, alongside the “value trap” tech stocks, are some undervalued tech companies that may trade at discounted valuations today, yet may bounce back in a big way, once company or industry-specific headwinds resolve. That’s the situation at hand with the following three undervalued tech stocks.
PagSeguro Digital (PAGS)
Domiciled in the Cayman Islands but operationally-based in Brazil, PagSeguro Digital (NYSE:PAGS) is a provider of payment processing software. Although shares have rebounded in the past year, this fintech play continues to trade at a fraction of what it traded for just before the late 2021/early 2022 stock market sell-off.
Moreover, PAGS stock sports a very low valuation of just 9.8 times forward earnings. Yes, this valuation is in line with other Brazil-based fintechs, like StoneCo (NASDAQ:STNE). As analysts at Goldman Sachs recently argued, the market is likely accounting for Brazilian macroeconomic headwinds, when it comes to pricing PAGS and comparable names at a low multiple. A key potential headwind right now is the prospect of higher interest rates in Brazil.
However, as the same analyst team also pointed out, despite possible macro uncertainty, PagSeguro is crushing it operationally. Namely, by making market share gains with its more profitable business segment. The company may be in for a big jump in earnings during 2025. If this pans out, and at the same time concerns about Brazilian stocks ease, undervalued PAGS may be poised to experience another breakout in price.
RingCentral (RNG)
RingCentral (NYSE:RNG) is another of the undervalued tech stocks, with an even lower forward valuation than PAGS. At current prices, shares in this provider of video meeting and cloud communication services trade for only 7.9 times forward earnings.
RNG stock has fallen to such a fire sale valuation, after extended declines following the peak of the pandemic and the “work from home economy.” Yet, while RingCentral’s growth has slowed down considerably, it may be shortsighted to say that it’s a deceptively cheap “value trap” stock. Back in December, founder Vlad Shumunis returned to the CEO role. With founding leadership back at the helm, RingCentral appears well-positioned to get back into higher-growth mode.
To some extent, this has already started. The company recently reported solid revenue growth of 9% last quarter. Chalk this up to a rebound in demand, plus the fact that RingCentral has embraced the AI revolution. Continued progress with the turnaround could spark a rebound for RNG, as even a re-rating to a higher but still-low multiple of between 10 and 15, would mean a big jump from current prices. RingCentral’s aggressive repurchasing of shares could also help put upward pressure on the stock.
WEX (WEX)
Shares in WEX (NYSE:WEX), a provider of payment and software services to the fleet management and corporate travel industries, have just recently become one of the undervalued tech stocks. It all started in April, right after the company’s Q1 2024 earnings release.
While revenue came in line with forecasts, earnings fell slightly short of expectations. Even as shares only slightly pulled back immediately after this lackluster earnings release, the slide has persisted on through the summer. As a result WEX stock has fallen from the low $230s to just over $175 per share. However, at current prices, WEX sports a dirt cheap multiple of only 10.8 times forward earnings.
Yet while uncertainty looms over WEX, there are some signs that better-than-feared results lie ahead. A new partnership with Booking Holdings (NASDAQ:BKNG) could provide a boost to future results. Also, as Seeking Alpha commentator Fernanda Galvez Jalil pointed out in a post-earnings write-up, investors are again overly concerned about the rise of EVs. While this widespread change could “disrupt” demand from WEX’s legacy end-user market, the company has and continues to diversify. Further end-user diversification could help assuage disruption worries, driving an eventual re-rating.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.