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September is so far living up to its reputation as a brutal month for stocks, with the equity market struggling to avoid more losses as we enter the final week of the third quarter. Investors are cautiously eyeing the Fed's “higher for longer” approach to interest rates as high energy prices prop up inflation, and ongoing economic concerns out of China have caused some speculators to lose their appetite for risk entirely.
As a result, many growth stocks have fallen hard off their 2023 highs - particularly in the tech sector, where quite a few names rode the wave of artificial intelligence (AI)-fueled euphoria to outsized gains during the first half of the year.
While it's not easy to wade in and buy during this kind of heightened volatility, there are certainly plenty of opportunities to pick up quality stocks at a relative discount right now. For bargain-minded investors, here we'll highlight three tech standouts that are trading near their 2023 lows - but now look deeply oversold, and could benefit quickly as positive momentum returns to growth stocks.
Block
Helmed and co-founded by Twitter (now X) founder Jack Dorsey in 2009, Block (SQ) - previously known as Square - is a fintech company that provides its consumers with payments, inventory management, investment, and sales tracking services. The company's market cap currently stands at $27.27 billion.
Block stock has had a tough time YTD, tumbling 27.5%. By comparison, the tech-heavy Nasdaq 100 Index ($IUXX) is up more than 34% for the year.
One key reason for SQ's underperformance was a March 2023 report from notorious short seller Hindenburg Research, which accused Square of relying on fraudulent business practices and inflated user metrics. Block denied the allegations, which it described as “typical short seller tactics” - but SQ gapped drastically lower on the Hindenburg report, then cascaded to new YTD lows after filling that gap.
In its latest results for the second quarter, Block's EPS more than doubled from the previous year to $0.39, topping the consensus estimate of $0.35. In fact, barring one instance, Block's EPS have surpassed expectations in each of the past five quarters. Net revenues rose 26% to $5.53 billion, driven by strong growth in transaction and subscription-based revenues.
The key Gross Payment Volume (GPV) metric grew by 12.4% from the prior year to $59 billion, with yearly GPV improvements of 12.2% and 15.1% for Square and Cash App, respectively.
For the current fiscal year, analysts are expecting SQ to narrow its net loss to $0.27 per share, before swinging to a net profit of $0.31 for fiscal 2024.
Overall, analysts have a “Moderate Buy” rating on the stock with a mean target price of $85.34, indicating upside potential of nearly 91% from current levels. Out of 32 analysts covering the stock 20, have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 10 have a “Hold” rating.
Ambarella
With all the excitement around AI, many semiconductor companies have rallied sharply this year. However, Santa Clara, CA-based Ambarella (AMBA) is not one of them. The shares are down more than 36% so far in 2023, despite the company's foothold in the AI industry.
Founded in 2004, Ambarella is a semiconductor company that designs and sells artificial intelligence (AI) chips for a variety of applications, including automotive, security, and consumer. The company's chips are used in a wide range of products, including self-driving cars, surveillance cameras, and drones. Ambarella currently commands a market cap of $2.09 billion.
For its latest quarter, Ambarella reported a loss per share of $0.15, which was narrower than the consensus estimate for a loss of $0.21 per share. In fact, its earnings have topped Street expectations in each of the past five quarters.
However, revenues skidded by 23.2% from the previous year to $62.1 million, and the company attributed the decline to ongoing inventory issues and “pockets of weak end-market demand.” As a result, AMBA cut its revenue and margin guidance for the current quarter, triggering a post-earnings sell-off.
Now, Wall Street is pricing in expected earnings declines through fiscal 2023.
Nevertheless, analysts remain cautiously optimistic about Ambarella. The consensus rating is a “Moderate Buy” with a mean target price of $75.86, indicating upside potential of about 46% from current levels. Out of 17 analysts covering the stock, 8 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, 6 have a “Hold” rating, and 1 has a “Moderate Sell” rating.
Box
We conclude our list with California-based cloud company Box (BOX). Launched in 2005, Box is a cloud content management and file-sharing company. It provides a cloud-based platform for storing, sharing, and managing content. Its market cap currently stands at $3.46 billion.
Box shares are down 22.6% in 2023, with the latest bout of price weakness sparked by a poorly received revenue forecast in its latest earnings report.
Revenues for the second quarter came in at $261.43 million, up 6.3% from the previous year. Further, EPS rose 28.6% to $0.36, which edged past the consensus estimate of $0.35. BOX has consistently surpassed Wall Street's earnings expectations over that past five quarters.
However, Box projected full-year revenues to range between $1.04 million to $1.044 billion, which fell short of Wall Street's $1.05 billion forecast.
Looking long term, analysts are projecting the company's earnings to rise by 300% in fiscal 2024, and another 262.5% in fiscal 2025.
Overall, analysts have handed out a “Moderate Buy” rating on the stock, with a mean target price of $31.88 - which denotes upside potential of about 32% from current levels. Out of 10 analysts covering the stock, 7 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 1 has a “Hold” rating, and 1 has a “Strong Sell” rating.
Final Takeaway
All three of these tech stocks are underperformers - but that said, there's reason to believe that additional downside could be limited. That's particularly true when considering the 14-day Relative Strength Index (RSI) measure on all three names, which points to deeply oversold conditions for AMBA, BOX, and SQ at current levels. As of this writing, AMBA has a 14-day RSI of 25.6, while the same metric for both BOX and SQ stands at around 20.
While these three analyst favorites are still in the process of forming a bottom on the charts, be sure to add these tech names to your watchlist - once the risk-on mood returns to Wall Street, there should be plenty of upside potential for oversold growth stocks like these.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
