Many tech stocks stumbled over the past several months as inflation, rising interest rates, and other macroeconomic headwinds drove investors toward more-conservative sectors. Plenty of solid stocks were tossed out with the bathwater during that hasty sell-off, but many of them might charge back with massive bull runs if the market warms up again.
Today I’ll take a closer look at three stocks that are underappreciated and undervalued — Coupang (NYSE: CPNG), Nintendo (OTC: NTDOY), and AT&T (NYSE: T) — and explain why they might rally.
Coupang, the top e-commerce player in South Korea, grew its revenue 93% in 2020 and another 54% to $18.4 billion in 2021. Its number of active customers jumped 21% to 17.9 million last year as its number of Rocket WOW subscribers — who pay monthly fees for free next-day deliveries, early morning deliveries, free returns within 30 days, streaming videos, food and grocery deliveries, and other perks — rose 50% to 9 million.
Coupang’s revenue grew 22% year over year to $5.1 billion in the first quarter of 2022, and its number of active customers hit 18.1 million. But like many other e-commerce companies, it faces bearish concerns about an imminent slowdown in a post-lockdown market. Its lack of profits and aggressive spending plans for its first-party logistics network, loss-leading WOW services, and Coupang Pay fintech-services platform made it an even less appealing investment.
That said, Coupang’s gross margin; adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin, and net profit margin all expanded sequentially and year over year in the first quarter. CEO Bom Kim also predicted its adjusted EBITDA margin would rise from 1.8% in the first quarter to “7% to 10% or higher” over the “long run” as economies of scale kicked in.
Analysts expect Coupang’s revenue to rise 21% this year, and its stock trades at a multiple of less than 1 time that estimate. That low valuation should limit Coupang’s downside potential and set it up for a big bull run.
Nintendo lost its luster over the past year as investors fretted over the Japanese gaming giant’s slowing growth in a post-lockdown world. Its video game releases throughout 2021 faced tough year-over-year comparisons against Animal Crossing: New Horizons’ blockbuster launch during the pandemic. It launched an upgraded Switch OLED model last October, but investors who had expected a proper successor to the original Switch, which was launched in early 2017, were sorely disappointed.
This year was initially expected to be stronger for Nintendo with the release of the eagerly anticipated sequel to The Legend of Zelda: Breath of the Wild and a Super Mario movie at the end of the year. But both of those projects have now been postponed to 2023.
Meanwhile, ongoing chip shortages and supply chain issues continue to throttle Nintendo’s available supply of Switch consoles. As a result, revenue and net profit fell 4% and 1%, respectively, in fiscal 2022 (which ended this March). It expects that slowdown to continue in fiscal 2023 as its revenue and net profit decline another 6% and 29%, respectively.
That outlook seems grim, but Nintendo’s business is cyclical, and it’s still sitting on plenty of bankable gaming franchises. At 16 times forward earnings, its stock should remain an attractive investment for value-oriented investors who realize its business will likely recover (as it did in its previous boom-and-bust console cycles) as it launches brand-new consoles and new games for its evergreen franchises, and expands its intellectual-property licensing business across theme parks, movies, and other nongaming markets.
Back in April, AT&T completed its spinoff of Warner Bros. Discovery (NASDAQ: WBD), which merged its former Time Warner (WarnerMedia) assets with Discovery. That spinoff marked the bitter end of AT&T’s disastrous, debt-fueled expansion of its pay TV and media businesses, which included its acquisitions of DirecTV in 2015, Time Warner in 2018, and numerous smaller media companies.
AT&T spun off DirecTV last year, divested many of its minor media assets, and finally agreed to spin off WarnerMedia. All of those moves were aimed at streamlining its business, reducing its long-term debt, and enabling it to focus on the growth of its core telecom businesses again.
AT&T expects its revenue to rise by the low single digits in both 2022 and 2023. It also expects its adjusted earnings per share (EPS) to come in between flat and 2% higher in 2022 and rise 2% to 7% in 2023. As a more streamlined company, this new AT&T plans to reduce its ratio of net debt to adjusted EBITDA from a “peak” of 3.1 at the beginning of 2021 to 2.5 by the end of 2023.
Those growth rates might seem anemic, but they’ll make AT&T a lot more comparable to Verizon and other blue chip stalwarts. AT&T significantly reduced its dividend after the spinoff, but it still pays a respectable forward yield of 5.3% and trades at less than 8 times forward earnings.
AT&T’s high yield and low valuation could make it a top safe-haven stock as nervous investors shun the market’s frothier growth stocks. As a result, it could actually rally and outperform the market this year.
Leo Sun has positions in AT&T, Coupang, Inc., Nintendo, and Warner Bros. Discovery, Inc. The Motley Fool has positions in and recommends Coupang, Inc. The Motley Fool recommends Nintendo, Verizon Communications, and Warner Bros. Discovery, Inc. The Motley Fool has a disclosure policy.