In this article, we will look at the 10 Worst Performing Affordable Stocks Under $40.
How’s the Market Performing after Fed Rate Cuts are Finally Here
The stock market has been anxiously waiting for the interest rate cut news. Analysts had been debating whether the Federal Reserve would make a 25-point or 50-point cut. The wait was finally over with good news for the market.
On September 18, the Federal Reserve Open Market Committee decided to cut the borrowing rates by the higher end of the expectation, which was 50 basis points. The rate cut indicated that inflation is moderating and that the labor market has weakened. This marked the first rate cut since the COVID-19 pandemic.
The decision was not unanimous as Fed Governor Michelle Bowman wanted a quarter-point cut. Moreover, the chairman Jerome Powell called the cuts to be a “recalibration”. One thing that the committee was confident about is the fact that inflation is moving sustainably towards the 2% mark.
Right after the decision the Dow Jones index jumped 375 points and then eased a little as the market digested the news. In one of our recent articles about 10 Worst Affordable Stocks To Buy Right Now, we talked about how Tom Lee, Fundstrat Global Advisors co-founder was confident that the market will perform positively both moving in and out of the announcement. Here’s an excerpt from the article:
“Tom Lee, Fundstrat Global Advisors co-founder, joined CNBC to talk about how the market is expected to perform moving into the fed rate cuts and after the announcement. Lee believes that one of the factors leading to confusion among investors is the election period. The market is expected to stay in a fluctuating environment for the next eight weeks until the elections are over. However, fed rate cuts are coming at a crucial time to give some positive for the market.
There are two main reasons leading up to the rate cuts, one being the inflation easing and the other being the slower labor market that needs help from the Federal Reserve. Moreover, Lee thinks that regardless of the Fed deciding on a 25-point or 50-point cut, the result is going to be positive for the market. He thinks that investors should be confident for the next 12 months as whenever the Fed cuts rates, the win ratio for the markets has been almost 100%. Moreover, the markets rally post-elections regardless of who takes the seat.”
Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business and Wisdom Tree chief economist, recently appeared on CNBC and expressed that he was pleasantly surprised by the Federal Reserve’s decision to make a 50 basis point cut. While talking about how the market is going to perform after the announcement, Professor Siegel said the market is going to be at an all-time high and there are not going to be any fluctuations as we have seen in the past few days.
The word “recalibration” holds significance here, the market has been 100% towards the target unemployment around 80% to 90% towards the inflation target and the Fed hadn’t moved the interest rate. Professor Siegel pointed out that the gap has been growing between the Fed Funds and the market conditions and they were thinking about a single cut by year-end until June. However, the latest announcement mentioned the Fed will cut rates at each meeting making a total of 6 cuts until June of next year. This will bring the Fed Funds rate down 200 basis points to 3.3%, which is where the professor thinks it should be.
Overall, the market and the economy seem to be heading towards a period of growth. The only foreseeable headwind is if the inflation picks up, however, analysts don’t see any signs of inflation picking up; rather they see all major industries doing well especially now that the rates have been cut.
A close-up of a laptop monitor with stock market prices scrolling up and down.
Our Methodology
To compile the list of the 10 worst performing affordable stocks under $40, we used the Finviz stock screener. We first defined criteria to ensure we only got the worst performing affordable stocks. We selected stocks trading below the market average Forward P/E (i.e. 23.79 as per Wall Street Journal), with earnings expected to grow this year, average analyst median price target upside potential of at least 30%, and a year-to-date decline of at least 30%. Moreover, we also ensured that these stocks were trading below $40 and were widely held by institutional investors.
Once the criteria were defined, we then selected 10 stocks that fit our criteria and ranked them in ascending order of the Year-to-Date decline. Please note that all the indicators used to rank the list were recorded on September 18.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Worst Performing Affordable Stocks Under $40
10. IHS Holding Limited (NYSE:IHS)
Share Price: $3.08
Analyst Upside Potential: 127.27%
Forward P/E Ratio: 5.08
Earnings Growth This Year: 18.50%
Number of Hedge Fund Holders: 8
Year-to-Date Decline: 30.32%
IHS Holding Limited (NYSE:IHS) is a United Kingdom-based company that focuses on building and managing networking towers. As of June 2024, the company operated more than 40,000 towers in 3 continents and is also recognized as the 3rd largest independent multinational tower company by tower count.
Services provided by IHS Holding Limited (NYSE:IHS) include colocation, fiber connectivity, and small-cell connectivity. It is a critical player in providing mobile connectivity in Sub-Saharan Africa, Latin America, and the Middle East.
The company has secured long-term partnerships with key players in its operational regions to ensure ongoing progress. It recently announced the renewal and extension of the partnership with MTN in Nigeria and across other African countries. As a result, the company has secured more than $12.3 billion in contracted revenue.
IHS Holding Limited (NYSE:IHS) has faced some headwinds from the overall macro environment, especially from the devaluation of Nigerian Naira which resulted in the revenue for the second quarter declining by 20% year-over-year. It is also one of the worst performing affordable stocks under $40 and has witnessed a 30.32% drop in share price on a year-to-date basis.
But that’s not it, while the revenue for the second quarter declined year-over-year it was still above analyst expectations by a margin of $428.4 million. IHS Holding Limited (NYSE:IHS) is now focused on value creation and operational efficiency. The CEO, Sam Darwish mentioned that group-wide they added 385 tenants, 1566 lease amendments, and built 207 new towers during the quarter. This resulted in overall growth of $111 million up 20.3% year-over-year.
Moreover, the company has been growing its towers, tenants, and lease agreements at a healthy compound annual growth rate of over 10% during the past 5 years. Wall Street is also bullish on the stock, 8 analysts have a strong Buy rating on the stock, with their 12-month median price target suggesting a 127.27% upside from the current level.
9. StoneCo Ltd. (NASDAQ:STNE)
Share Price: $12.31
Analyst Upside Potential: 50.49%
Forward P/E Ratio: 10.37
Earnings Growth This Year: 33.70%
Number of Hedge Fund Holders: 35
Year-to-Date Decline: 30.33%
StoneCo Ltd. (NASDAQ:STNE) is a digital payment and financial services company that helps businesses manage their payments and grow via various software solutions. The software solutions provided by the company include Point of Sale, Enterprise Resource Planning, Customer Relationship Management, and E-commerce solutions.
These software solutions provided by the company differentiate it from its customers. One of the key markets of StoneCo Ltd. (NASDAQ:STNE) is the MSMB (Micro, Small, and Medium Businesses). The financial condition of the company can be estimated by the second quarter’s financial results. The company grew its MSMB card payment total volumes by 17.4% year-over-year and adjusted net income by 54.4% year-over-year.
Management has also been able to grow its MSMB client base during the quarter. The Client deposits increased 65.2% year-over-year, with the client base improving 65.2% during the same time. While the performance is impressive, what differentiates StoneCo Ltd. (NASDAQ:STNE) is its ability to reduce administration expenses while growing its finances robustly. The company has been able to reduce its admin expense by 12.6% year-over-year, indicating its leap towards sustained profitability and growth.
Although the stock has been down 30.33% on a year-to-date basis and is one of the worst stocks under $40, the financial performance discussed above and analysts’ sentiment says otherwise. Not only was the stock held by 35 hedge funds in Q2 2024, with total stakes worth $576.7 million. Point72 Asset Management is the top shareholder with a position worth $100.6 million. 18 analysts have a consensus Buy rating on the stock, with their 12-month median price target suggestive of a 50.49% upside from current levels.
Ave Maria World Equity Fund stated the following regarding StoneCo Ltd. (NASDAQ:STNE) in its fourth quarter 2023 investor letter:
“StoneCo Ltd. (NASDAQ:STNE) provides solutions that enable merchants and integrated partners to conduct electronic commerce seamlessly across in-store, online, and mobile channels in Brazil. StoneCo has faced near-term operational challenges because of the pandemic and high levels of inflation in Brazil. The company appears to be moving past these challenges and it appears that the successful integration of the newly acquired software business with its payments business will drive substantial shareholder value longer term.”
8. LiveRamp Holdings, Inc. (NYSE:RAMP)
Share Price: $25.81
Analyst Upside Potential: 60.79%
Forward P/E Ratio: 16.12
Earnings Growth This Year: 11.70%
Number of Hedge Fund Holders: 32
Year-to-Date Decline: 30.51%
LiveRamp Holdings, Inc. (NYSE:RAMP) is a technology company that specializes in data collaboration for marketing purposes. It is recognized as one of the leading adtech companies with more than 900 direct subscription customers and 500 plus advertising activation partners. It provides a platform for businesses to share and connect their customer data security in a manner that protects customer privacy.
LiveRamp Holdings, Inc. (NYSE:RAMP) is an adtech company that seems to be on the right side of the trending advertisement market. Moreover, its high-margin business model and target market put the company in an accelerated growth mode. The first quarter of 2025 was a testimony of just that. The company posted double-digit growth in both total revenue and subscription revenue for the second consecutive quarter.
Revenue grew 14% year-over-year to reach $176 million whereas gross margins were high at 71%. The revenue growth was driven by both its business segments, however, Marketplace revenue took the lead and grew 28% during the same time.
LiveRamp Holdings, Inc. (NYSE:RAMP) has been under some challenges mostly originating from the recent changes in Google’s privacy policy, however, management remains confident that it will be able to take advantage of the changes. CEO, Scott Howe mentioned that the announcement by Google has not been understood properly. He acknowledges that Google is abandoning its original plan of deprecating third-party cookies in early 2025. On the other hand, it is also announcing a new plan that will make it easier for consumers to opt out of third-party tracking and a new IP protection.
Management believes that as cookies are becoming irrelevant for advertising, businesses are moving towards trusted data brands like LiveRamp Holdings, Inc. (NYSE:RAMP) as their content destinations. Moreover, the company has made significant progress with its Authenticated Traffic Solution, a technology designed to help publishers and advertisers effectively connect and utilize user data while maintaining privacy, thereby solidifying its position in a changing environment.
Meridian Contrarian Fund made the following comment about LiveRamp Holdings, Inc. (NYSE:RAMP) in its Q2 2023 investor letter:
“A holding that warranted an additional investment during the quarter was LiveRamp Holdings, Inc. (NYSE:RAMP) a developer of a data connectivity platform that sharpens targeted advertisement placements while shielding consumer data privacy. The company’s technology allows improved advertising targeting and measurement across internet-based, streaming, and traditional verticals while meeting the ever-shifting data privacy regulations being enacted globally. We initially invested in the first quarter of 2023 following a difficult 2022 in which advertising spending slowed and LiveRamp rolled out new products and brought on new salespeople—which all combined to drive down earnings. In addition to the investments in future growth, however, management also reduced legacy products, which has lowered costs and improved earnings and cash flow through the first part of 2023, despite a still-tough advertising environment. We added to our position during the second quarter as the company’s internally driven earnings turn appeared to take hold, emphasizing our approach to opportunistic value and gaining access to one of the fastest-growing advertising verticals such as streaming television.”
7. Vale S.A. (NYSE:VALE)
Share Price: $10.58
Analyst Upside Potential: 41.78%
Forward P/E Ratio: 4.85
Earnings Growth This Year: 19.70%
Number of Hedge Fund Holders: 34
Year-to-Date Decline: 32.65%
Vale S.A. (NYSE:VALE) is one of the major mining companies based in Brazil. The company mainly focuses on iron ore and nickel production. With operations running in more than 30 countries, the company plays a key role in the construction and manufacturing industry by providing iron ore in large quantities.
In fact, during the most recent quarter which is Q2 2024, Vale S.A. (NYSE:VALE) achieved record high production since 2018. The company produced 81 megatons of iron with its S11D reaching a record production for the quarter. As a result of high production, the shipment also increased by 7% year-over-year leading to a reaffirmed 2024 guidance of $21.5 to $23 per ton.
Despite robust performance, the company missed analysts’ expectations in terms of revenue and EPS. During the second quarter, it generated $9.9 billion in revenue, $98.3 million short of market consensus. Moreover, the stock has declined 32.65% on a year-to-date basis and is among one of the worst performing affordable stocks under $40.
But the story does not end here. We have already seen how the company recently reached a record-high production of iron, and management’s strategic goal to become a preferred low-carbon steel supplier is still to be discussed. Vale S.A. (NYSE:VALE) has two major projects under construction. These projects will add more than 30 megatons of iron to the company’s portfolio, combined. The Vargem Grande and Capanema projects are nearing construction and will be ready to operate soon, meaning a step forward toward management’s goal.
Analysts have also acknowledged the progress. 24 analysts have a consensus Buy rating on the stock, with their median price target of $15 presenting an upside of 42% from current levels.
Miller Value Partners Income Strategy made the following comment about Vale S.A. (NYSE:VALE) in its second quarter 2023 investor letter:
“Vale S.A. (NYSE:VALE) fell during the quarter with iron ore prices. The company reported 1Q23 revenue of $8.44B, -22.7% Y/Y, below consensus of $8.79B, and Adjusted EBITDA of $3.69B, compared to 1Q22 EBITDA of $6.55B, below consensus of $4.49B. The Brazilian miner produced 66.8 million tons (Mt) of iron ore in 1Q23, +5.8% Y/Y, below consensus of 67.7 Mt, 67.0 thousand tons (kt) of copper, +18.4% Y/Y, and 41.0 kt of nickel, -10.5% Y/Y. Although management reaffirmed its FY23 production guidance, analysts seemed to be concerned by the negatively offsetting impacts of weaker iron ore prices as China, the world’s largest iron ore buyer, has threatened to curb any “unreasonable” price gains for the metal in an effort to prevent this year’s steel output from exceeding 2022 levels. Vale generated 1Q23 free cash flow (FCF) of $2.28B, bringing trailing-twelve month (TTM) FCF to $6.73B, or a FCF yield of 11.3%. The company repurchased $763MM worth of shares in the quarter and paid $1.80B in dividends, bringing total capital returned to shareholders in the quarter to $2.56B, or 4.3% of the company’s market cap.”
6. Kosmos Energy Ltd. (NYSE:KOS)
Share Price: $4.37
Analyst Upside Potential: 83.07%
Forward P/E Ratio: 5.73
Earnings Growth This Year: 9.70%
Number of Hedge Fund Holders: 25
Year-to-Date Decline: 35.07%
Kosmos Energy Ltd. (NYSE:KOS) is an oil and gas company that focuses on exploring and producing energy from deepwater locations. It has operations in key locations such as Ghana, Equatorial Guinea, the U.S. Gulf of Mexico, Mauritania, and Senegal.
The stock has been down 35.07% on a year-to-date basis, making Kosmos Energy Ltd. (NYSE:KOS) one of the worst performing affordable stocks under $40. However, analysts think otherwise, 8 analysts have a strong Buy rating on the stock, with their 12-month median price target of $8 presenting an upside of 83% from current levels.
So what defines this bullish sentiment from the analysts? Kosmos Energy Ltd. (NYSE:KOS) is one of the stocks that is expected to benefit from higher oil and gas prices as soon as the economy bounces back. Moreover, the company’s financial performance has also been strong as demonstrated by 16.34% year-over-year revenue growth during the second quarter of 2024.
Management aims to increase its production by 50% and the recent quarter results already indicate significant progress. The company has been able to increase its production by 7% year-over-year and produces 62,000 barrels of oil daily.
Moreover, the company also aims to substantially improve its free cash flow generation to a range of $100 million to $150 million each quarter. If management pulls it off, Kosmos Energy Ltd. (NYSE:KOS) will be able to reduce its debt and simultaneously expand its operating ventures. It has recently started production at Winterfell, with the company owning 25.04% interest at the site.
Patient Capital Management stated the following regarding Kosmos Energy Ltd. (NYSE:KOS) in its fourth quarter 2023 investor letter:
“Kosmos Energy Ltd. (NYSE:KOS) declined from the high seen at the end of September following energy prices lower. The company was also hit as they marginally increased CAPEX expectations and hinted at the potential for their first gas delivery out of Tortue being delayed to 2Q24 from 1Q. Kosmos is an exploration and production services company with assets in Africa. The company is differentiated in the Exploration & Production space because of its growth profile (+30% YoY in 2024), long reserve life (>20yrs, nearly double the sector average) and focus on liquified natural gas (LNG). While the market is focused on near-term risk of production delays, we believe it is ignoring the long-term value of the underlying assets. As we move into 2024, production should inflect higher, climbing 30% YoY, while CAPEX comes down, declining 20% YoY. Together this leads to attractive growth and free cash flow generating asset providing the company the ability to pay down their debt and to return capital. At these levels, the company will generate more than its current market cap in FCF over the next 5 years at $90 Brent prices. With the combination of gas-heavy reserves and inflecting cash flow generation, we think Kosmos is significantly undervalued and a potential acquisition target.”
5. Bioceres Crop Solutions Corp. (NASDAQ:BIOX)
Share Price: $8.48
Analyst Upside Potential: 53.30%
Forward P/E Ratio: 20.85
Earnings Growth This Year: 600.00%
Number of Hedge Fund Holders: 8
Year-to-Date Decline: 37.74%
Bioceres Crop Solutions Corp. (NASDAQ:BIOX) is an agriculture technology company that aims to promote carbon neutrality in farming. The company is engaged in developing and selling advanced seed technology that combines crop protection and nutrition solutions. It has more than 750 patents and patent applications with a commercial presence in 45-plus countries.
Bioceres Crop Solutions Corp. (NASDAQ:BIOX) has been facing challenges from the market which led to its price falling more than 37% on a year-to-date basis. However, the company ended the most recent quarter FQ4 2024 on a successful note.
Revenue for the fourth quarter amounted to $124 million, an 18% increase from the comparable quarter last year. Its diversified revenue sources and HB4 and other corp protection-related sales allowed the company to remain in positive figures despite a harsh market environment. Overall Bioceres Crop Solutions Corp. (NASDAQ:BIOX) ended the fiscal year with $464.8 million in revenue, up 11% year-over-year and net income of $6.2 million.
One of the key developments management was able to achieve during the quarter was regarding its HB4 being approved for cultivation in the United States. The United States is the fourth largest producer of wheat in the world as per the management’s finding and thereby this approval will open new avenues of prolonged growth for the company.
Although it is one of the worst performing affordable stocks under $40, that doesn’t mean it can not be a viable investment option. 5 analysts have a strong Buy rating on BIOX, their 12-month median price target of $13 is presenting an upside of 53% from current levels.
4. Tuya Inc. (NYSE:TUYA)
Share Price: $1.38
Analyst Upside Potential: 84.78%
Forward P/E Ratio: 12.37
Earnings Growth This Year: 266.70%
Number of Hedge Fund Holders: 10
Year-to-Date Decline: 39.47%
Tuya Inc. (NYSE:TUYA) is an international cloud platform service provider that specializes in the Internet of Things market. It helps businesses create and manage smart devices like smart home products, by offering a range of cloud-based services and tools. The cloud platform provided by the company allows device connection, data analytics, and automation tasks, meaning that once the is connected to the cloud it can be remotely operated to interact with other connected devices.
One of the differentiating factors of Tuya Inc. (NYSE:TUYA) is that it enables businesses to develop their own IoT solutions thereby reducing costs for the businesses it caters to. The stock has been down 39.4% over a year-to-date basis and is one of the worst performing affordable stocks under $40.
But there is another side to the story as well, the company’s fiscal second quarter of 2024 came in with some key financial highlights that might change the bearish sentiment. Tuya Inc. (NYSE:TUYA) has been posting consecutive quarters of year-over-year growth for quite some time now. The recent quarter was no different, its revenue grew 29% year-over-year to reach $73.3 million with net profit margins at 28% indicating a significant increase over the previous year.
It seems that the management has been focused on improving its operational efficiency as the company made $7.4 million through its operational profits during Q2, up from $6.4 million during the comparable quarter last year.
With a vast network of IoT developers spanning more than 200 countries, Tuya Inc. (NYSE:TUYA) was able to service 3,000 customers in the latest quarter. Hedge funds are also showing interest in the company, it was held by 10 hedge funds in Q2 2024, with total stakes worth $6.39 million.
3. Rambus Inc. (NASDAQ:RMBS)
Share Price: $38.65
Analyst Upside Potential: 69.47%
Forward P/E Ratio: 20.09
Earnings Growth This Year: 10.10%
Number of Hedge Fund Holders: 21
Year-to-Date Decline: 40.77%
There is a mixed sentiment among investors for the semiconductor product company Rambus Inc. (NASDAQ:RMBS). The company offers DDR memory interface chips and DDR4 memory interface chips. It also engages in interface IP and security IP technologies.
The stock is trading at a lower forward price-to-earnings ratio of 20.09 while the market average is at around 24. Its share price took a hit and has been down more than 40% on a year-to-date basis, making Rambus Inc. (NASDAQ:RMBS) one of the worst performing affordable stocks under $40. The reason behind the stock going down was partly due to not meeting analysts’ expectations. The company delivered $132 million in revenue, which was up 10% year-over-year but fell short of the market consensus of $139 million. Another reason was a decrease in its net income which fell from nearly $169 million in Q2 2023 to $36 million in the second quarter.
While this is a bearish sentiment, analysts have high hopes for the company. 6 analysts have a consensus Buy opinion on the stock, with their 12-month median price target of $65.50 presenting a 69% upside from the current level. Investors are betting on Rambus Inc.’s (NASDAQ:RMBS) new strategy to develop an industry-leading product roadmap for data centers and AI.
It has gained momentum in the Silicon IP design which is fueled by a product roadmap for data centers and AI. The company has introduced a family of PCIe 7 IP solutions for AI and HPC. Moreover, it is projecting double-digit growth for the fiscal third quarter with subsequent growth in its chip segment. It is also one of the 7 Best Debt Free Stocks To Buy.
Carillon Chartwell Small Cap Growth Fund stated the following regarding Rambus Inc. (NASDAQ:RMBS) in its first quarter 2024 investor letter:
“Rambus Inc. (NASDAQ:RMBS) shares lagged as the company disappointed investors with weak guidance for the first quarter of 2024, due to lower product revenues for the semiconductors it makes. Spending on traditional servers has been lower, replaced by AI spending, which is having a negative impact on Rambus.”
2. The Goodyear Tire & Rubber Company (NASDAQ:GT)
Share Price: $8.01
Analyst Upside Potential: 38.58%
Forward P/E Ratio: 8.18
Earnings Growth This Year: 381.00%
Number of Hedge Fund Holders: 36
Year-to-Date Decline: 43.63%
The Goodyear Tire & Rubber Company (NASDAQ:GT) is a global tire manufacturer based in Ohio. The company manufactures a line of tiers for various vehicles including cars, buses, motorbikes, trucks, airplanes, and other heavy machinery vehicles. The company has manufacturing plants in more than 22 countries and operates around 950 retail outlets across the globe.
The stock has plunged more than 43% on a year-to-date basis and ranks among the worst affordable stocks to buy under $40. The major reason for the stock price going down has been the recent quarter Q2 2024, where the company fell short of analyst expectations. Wall Street was expecting revenues at $4.78 billion, however, the company was able to deliver only $4.57 billion. On the other hand, its net sales also took a hit and were down 6.1% year-over-year.
However, this is just a minor part of the story. Talking about the positive highlights, The Goodyear Tire & Rubber Company (NASDAQ:GT) just swung from a loss of $208 million to a profit of $85 million. It also topped analysts’ expectations in terms of EPS growth, Earnings on an adjusted basis of $0.19 per share were ahead of the market consensus of $0.14 per share.
Moreover, management has been able to improve the segment operating income by more than 173% from the previous year. Its Segment operating margins were up across all three geographical segments with the Asia Pacific region being the only region with positive net sales growth year-over-year.
The Goodyear Tire & Rubber Company (NASDAQ:GT) is also popular among hedge funds, it was held by 36 hedge funds in the second quarter with total stakes amounting to more than $321 million.
1. Five9, Inc. (NASDAQ:FIVN)
Share Price: $28.39
Analyst Upside Potential: 76.12%
Forward P/E Ratio: 12.7
Earnings Growth This Year: 10.70%
Number of Hedge Fund Holders: 34
Year-to-Date Decline: 62.64%
Five9, Inc. (NASDAQ:FIVN) is a cloud-based software company that provides solutions for contact centers. The company enables businesses to manage their customer interactions effectively through a cloud-based software that allows communication through various channels.
The company differentiates itself from its competitors due to its artificial intelligence integration that enables features such as automated responses and intelligent routing of customer inquiries to the right agents based on their expertise. To further bolster the growth of its artificial intelligence, Five9, Inc. (NASDAQ:FIVN) has acquired Acqueon, a proactive outbound omnichannel customer engagement company.
While the stock has been down on a year-to-date basis by more than 62% and is one of the worst performing affordable stocks under $40, management is optimistic about its long-term growth especially due to its AI market.
If we look at the most recent quarter (Q2 2024) results the analyst upside potential of 76% seems reasonable. Five9, Inc. (NASDAQ:FIVN) just surpassed the $1 billion mark in annual revenue. Its overall subscription revenue growth was also impressive indicating a 17% increase.
The recent quarter also marked significant logo wins for the company It signed deals for Higher education enrollment management with an expected annualized recurring revenue (ARR) of $1.3 million and another with a healthcare provider with $1.1M in anticipated ARR. It was held by 34 institutional investors in the second quarter of 2024, with total stakes worth $389.9 million. Alyeska Investment Group is the top shareholder of the company with a position worth $94.2.
Brown Capital Management Mid Company Fund stated the following regarding Five9, Inc. (NASDAQ:FIVN) in its Q2 2024 investor letter:
“Five9, Inc. (NASDAQ:FIVN) is a leader in cloud-based contact-center software, which serves as the routing engine to connect callers to agents. With the growth of e-commerce, consumers are making fewer in-person visits to stores but contacting companies more frequently, driving the need for world-class contact-center software solutions like Five9’s. It has been a tough couple of years for Five9’s stock and this quarter provided no relief. Competitive concerns, questions about AI’s long-term impact on the business and deteriorating macroeconomic conditions have all cast clouds over the company’s stock. Five9’s consumer segment, one of its largest divisions, has really struggled of late as clients hire fewer call-center agents, pressuring Five9’s seat-based revenue model. Total revenue growth decelerated to 13% year-over-year in the most recent quarter, down from 28% and 17% in 2022 and 2023, respectively. Moreover, management guided to 16% for the full year 2024, which some consider optimistic given the weak start to the year. These worsening sales trends further weighed on shares during the quarter.
Looking through the current industry doldrums, we see a bright future for Five9. The company inked its largest deal ever during the quarter, which will generate more than $50 million in annual revenue once fully rolled out. We believe this is an important signal of Five9’s long-term potential. The company is attacking a $60 billion market opportunity, is winning new business at industry-leading rates and is gaining share from legacy incumbents stuck with antiquated technology. We continue to assess the potential threat of AI, but so far it has provided an uplift to company results. The company’s AI product is very popular with large enterprises as it assists agents with customer interactions and can sometimes be used to fully automate interactions. Far from shrinking the number of industry seats, as some fear, management said revenue per seat doubles when customers adopt their AI applications. We expect sales growth to pick up markedly in the coming years, which should result in much stronger stock performance.”
While we acknowledge the potential of Five9, Inc. (NASDAQ:FIVN) to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure. None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and investors. Please subscribe to our daily free newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
