3 Cheap Stocks for Patient Investors

Susan Dziubinski:

Hi I’m Susan Dziubinski with Morningstar.

Several big-name technology and communications companies have reported third-quarter results. How did things shake out? In many cases, earnings disappointed—and guidance for the fourth quarter didn’t look much better.

In response, Morningstar’s analysts have trimmed the fair value estimates on some of these stocks. But even after the fair value cuts, several of these names still look underpriced to us. We think they remain compelling investment opportunities for patient, long-term investors.

Let’s take a closer look at three of these opportunities.

3 Cheap Stocks for Patient Investors

These 4- and 5-star stocks are considered undervalued. Data as of Nov. 4, 2022.

1. Amazon.com (AMZN)
2. Alphabet (GOOG)
3. Microsoft (MSFT)

First up is Amazon AMZN. After Amazon issued weak third-quarter earnings and soft fourth-quarter guidance, we cut our fair value estimate from $192 to $150 per share. We think Amazon’s near term is clouded by macroeconomic issues such as currency headwinds, high inflation and energy costs, and a deceleration in Amazon Web Services—and we expect these headwinds to persist into 2023. That being said, Amazon stock looks quite undervalued to us at current prices.

Next is Google’s parent company, Alphabet GOOG. We slightly reduced our fair value estimate to $160 per share from $169 per share after Alphabet released disappointing third-quarter results. While the cloud business posted impressive growth, overall revenue growth decelerated thanks to a stronger dollar and a hesitancy in ad spending. But we expect ad revenue growth to rebound in 2023, and we think the stock is attractive.

Last is Microsoft MSFT. Microsoft’s results were actually pretty solid, but the company’s outlook was worse than expected, as macroeconomic issues continue to weigh on company performance. We reduced our fair value estimate to $320 per share from $352, based on lower revenue growth and operating margin forecasts for fiscal 2023 and 2024. But we think it’s premature to say the Azure growth story is over, and we think Microsoft stock looks cheap today.

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Watch 2 Scary Stocks for more from Susan Dziubinski.