Uncovering Three Budget-Friendly Stocks Poised for a Bull Run
With the S&P 500 and Nasdaq Composite almost scratching their all-time highs, some investors might hesitate to add new stocks to their portfolios. After all, investing legend Warren Buffett encouraged being "fearful when others are greedy" and "greedy when others are fearful." However, despite the high valuations, there are still some undervalued gems out there. Let's delve into three such stocks: Lumen Technologies (LUMN), Applied Materials (AMAT), and Opendoor Technologies (OPEN).
1. Lumen Technologies
In 2024, Lumen Technologies, the telecom company formerly known as CenturyLink, confronted troubling times. For five consecutive years, its revenue dropped, and it became unprofitable over the last two. Even worse, it canceled its dividends in 2022. Its negative free cash flow and mountainous $18.1 billion long-term debt made for a grim picture.
Unlike many other telecom companies, Lumen chose to expand its wireline business rather than jump into the wireless market to shield itself from the slow-growing wireline segment. Instead, Lumen launched fiber plans, bundled cloud, security, and collaboration services into its enterprise-oriented plans, and broadened its offerings. Unfortunately, the rapid decline of its business wireline segment counterbalanced the growth of its consumer-facing fiber segment.
Due to these struggles, Lumen's stock plummeted to under $1 in June 2024. However, a series of AI connectivity deals, including one with Microsoft's Azure, revitalized the company. These partnerships secured $8.5 billion for Lumen and brought a new wave of optimism. The AI market expansion could aid Lumen's struggling business wireline segment and boost its stock over the next few years.
While Lumen still requires some improvement, its enterprise value of $22.8 billion places it under two times this year's sales. If this company finally gets its act together, its shares may soar higher as the AI market expands.
2. Applied Materials
As a major supplier of semiconductor manufacturing equipment, Applied Materials lands contracts with a variety of customers in the foundry, logic, and memory chipmaking markets. Though its growth boomed during the pandemic, it slowed down as it caught up to its past growth surge, faced macro challenges, and dealt with tighter export regulations in China.
However, the increasing demand for AI chips, more energy-efficient chips, and denser memory chips is predicted to revive Applied Materials' semiconductor equipment business. Analysts expect its revenue and adjusted EPS to rise 9% and 10%, respectively, in fiscal 2025. Those growth rates, considering its stock trades at just 17 times forward earnings, indicate a solid investment opportunity.
Yet, Applied Material's close ties to China have raised some concerns. China accounted for 37% of its sales in fiscal 2024, and investigations by the U.S. Department of Justice (DOJ) caused some potential funding setbacks, like in the rejection of a $4 billion R&D facility request. Investors should monitor these developments, but Applied Materials has weathered tough conditions in the past.
3. Opendoor Technologies
As the largest "iBuyer" of homes in America, Opendoor lets homeowners receive an instant cash offer, handles repairs, and puts the home back on the market through its online platform. While its digital approach simplifies the purchasing and selling process, it demands heavy investments in renovating homes, only thrives in a vigorous housing market, and has AI algorithms that aren't always accurate when evaluating properties' worth.
Opendoor's growth surged in 2021 but started to falter when interest rates increased and higher renovation expenses eroded its margins. Then, in 2022, it and rivals like Redfin and Zillow decided to exit the iBuying market due to the challenging market conditions. Consequently, Opendoor's revenues plunged 55% in 2023.
Despite this negative outlook, analysts believe Opendoor's revenue will grow by 22% in 2025. With its biggest competitors out of the market, Opendoor may secure a dominant position in the iBuying sector. In turn, its stock could gain momentum to catch up with its cheaper valuation as the interest rates decrease and the housing market rebounds.
[1] Enrichment Data
- Challenges for Lumen Technologies: Lumen's reliance on the legacy communication business and the gradual shift towards software-defined networking solutions pose threats to its sales and revenue growth.
- Opportunities for Lumen Technologies: The booming AI market, backed by the expanding demand for AI-related bandwidth, presents numerous possibilities for the telecom company to capitalize on and bolster its financial stability. In addition, potential acquisitions could further strengthen Lumen Technologies' operational capabilities and liquidity position.
- General Factors: In the tech industry, the increasing adoption of AI, ongoing M&A activities, and robust economic trends in Latin America and Asia can contribute considerably to stock price growth.
- Although some investors might be hesitant to invest in telecom stocks due to high valuations, Lumen Technologies' undervalued enterprise value of $22.8 billion could present a promising opportunity for those seeking gains in the finance sector.
- Despite facing challenges in the semiconductor industry, Applied Materials' position as a major supplier of semiconductor manufacturing equipment, along with its expected revenue and earnings growth, makes it an attractive option for investors looking to invest in the technology sector and capitalize on the expansion of the AI chip market.
