The stock market has been on a volatile ride in 2023, as investors grapple with the effects of higher interest rates, slowing consumer and business demand, and geopolitical uncertainties. However, most U.S. equities have benefitted from better-than-expected economic growth in the United States, as reflected by the rise of major indices like the S&P500 and the Nasdaq.
Not all stocks, however, have benefitted from the broad rally. Plenty of businesses have experienced slowing revenue growth due to the challenging macroeconomic environment and have thus not experienced the significant share appreciation that some stocks like Nvidia (NASDAQ:NVDA) have seen this year. This is where potential opportunities lie.
Below is a list of three undervalued growth stocks that equity investors should buy in August.
TDCX (TDCX)
Customer experience services and solutions have been increasingly outsourced to specialized technology services firms in order to reduce internal costs. TDCX (NYSE:TDCX) is one of these companies specializing in this vertical of business process outsourcing (BPO). Based in Singapore and with teams around Southeast Asia, TDCX is a leading provider of digital customer experience solutions, offering services such as customer support, sales, technical support, content moderation, and digital marketing. As an example, one of TDCX’s top clients is Facebook, and the digital services company offers content monitoring services, which helps Facebook to identify and rid its platform of harmful content.
TDCX has broadly benefitted from having a relatively low-cost but dynamic business model. The company has teams across Southeast Asia, including Singapore, Malaysia, Thailand, Vietnam, and the Philippines, enabling it to service companies trying to sell products and services in the growing region.
In 2022, the company reported revenue of $664.1 million, up nearly 20% year-over-year. Further, adjusted EBITDA came in at $199.7 million, representing a robust margin of 30%. Lastly, net margins came in at nearly 16%.
Though financial results were positive overall this year, they lacked the eye-popping growth numbers of prior years. The dampened growth was primarily driven by an unfriendly macro environment which has hit the technology services industry more broadly. In 2023, TDCX expects to grow its revenue by 3% to 8%, reflecting the company’s limited visibility into its clients’ future demand.
Trading at a forward enterprise value multiple of 4.6-times projected EBITDA, the company remains relatively undervalued. Nonetheless, an eventual economic recovery and the rapid growth awaiting TDCX’s operating region, Southeast Asia, should leave investors feeling optimistic. Ultimately, TDCX is a bargain for growth investors who want exposure to the fast-growing digital customer experience sector.
Salesforce (CRM)
Salesforce (NYSE:CRM) is the world’s leading provider of cloud-based software for customer relationship management (CRM). Serving more than 150,000 customers, the company offers solutions for sales, service, marketing, commerce, platform, integration, analytics, and more.
Prior to the recent macroeconomic slowdown, Salesforce had grown rapidly off of the tailwinds brought about by enterprises implementing cost-saving digital transformation efforts, including digitizing their CRM practices. Still, Salesforce has been hit with the recent headwinds of a challenging macro environment, which has made it tougher for the software company to acquire new customers or upsell existing ones. In 2022, the company reported revenue of $31.3 billion, up 18% year-over-year but below the prior year’s top-line growth figures which were in the mid-twenties. The slowed growth led Salesforce to cut 10% of its workforce after “hiring too many people.”
In 2023, Salesforce expects to grow its revenue by approximately 10% year-over-year, reflecting again a difficult selling environment. However, the company’s enterprise value is trading at around 16.3-times forward EBITDA, which seems a tad expensive but given where the company’s growth prospects are, the pricing is perhaps justified. As the economy improves, companies will continue to pursue CRM through purchasing cost-effective cloud products. The company’s recent acquisition of Slack Technologies, a leading platform for business communication and collaboration, will also enhance Salesforce’s ability to connect with its customers and partners in the digital era.
Qualys (QLYS)
Qualys (NASDAQ:QYLS) is a leading provider of cloud-based security and compliance solutions, helping organizations to identify and mitigate cyber risks across their IT assets. The cybersecurity provider has a diversified customer base, serving more than 10,000 customers across various industries and geographies, including a majority of each of the Forbes Global 100 and Fortune 100 companies. In particular, Qualys has designed a cloud platform, dubbed the “Qualys Cloud Platform.” This platform includes a number of IT infrastructure applications, offering an integrated suite of solutions automating the lifecycle of asset discovery and management, security assessments, and compliance management.
Qualys has been achieving consistent and robust financial performance numbers, with revenue increasing by 19% year-over-year in 2022. That’s a sigincant improvement over previous years’ growth numbers, despite the difficult macro environment. Further, Qualys’s profitability metrics are also impressive with gross margins consistently above 75% and EBITDA margins in the above 30%. The company has also generated net income at a healthy margin.
With consistent earnings beats in 2023 and a strong balance sheet with nearly $350 million of cash and a zero-debt balance, Qualys remains an attractive growth stock, despite trading a bit on the high side at 20.4-times forward EBITDA. In my opinion, the company’s quality financials coupled with share performance beating the S&P500 year-to-date (and over the past 5 years) justify its current price.
On the date of publication, Tyrik Torres did not have (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.
