We recently compiled a list of the 12 Most Undervalued Tech Stocks to Invest in Now. In this article, we are going to take a look at where Dropbox, Inc. (NASDAQ:DBX) stands against the other undervalued tech stocks.
Will Tech And AI Be The Driving Force in 2025?
Katrina Dudley, global equity portfolio manager at Franklin Templeton Investments joined CNBC on December 31, 2024, to discuss which sectors are expected to continue with their gains in 2025. She mentioned that it is important to understand what sectors performed well last year to predict the future performance of the market. Dudley highlighted that technology was one of the sectors that worked well last year followed by some utility sector companies. The utility sector companies that performed well were mostly those power-producing companies that experienced increased demand due to AI. She emphasized that one of the themes she believes is secular and will continue to perform is the AI and the technology sector.
While talking about the high valuations of technology and communication services sector, Dudley acknowledged that these sectors are trading at lofty valuations above the S&P 500 index. However, she emphasized that valuations have never been a reason to sell something. It is important to unpack what high valuations are telling about the industry. She thinks that valuations at the moment reflect the number of things that the market is getting right. For instance, the earnings growth for these sectors has been positive, which is very different from the infinite bubble scenario. Moreover, the second contributing factor to higher valuations as explained by Dubley is the network effect, which is driving returns to the biggest players in the industry. Concerning these two points, she thinks there is a good rationale behind the tech stocks’ high valuation.
Dudley also highlighted that one of the ways the valuation multiple can come down is when these companies grow their earnings ahead of market consensus. This she believes is one of the risks that the market should be cognizant about. As earnings growth for any company is difficult to predict and when the market is expecting the company to deliver earnings growth there is always a risk of mis-execution. Therefore these high valuation companies need to deliver on earnings growth. Dudley mentioned that she is not worried about the valuations however it is something that she would be watching closely.
Our Methodology
To compile the list of the 12 most undervalued tech stocks to invest in now, we used the Finviz stock screener, Seeking Alpha, and Yahoo Finance. Firstly, we aggregated a list of tech stocks trading under the Forward P/E of 15 with positive earnings growth expected this year. Next, we cross-checked the Forward P/E ratio of each company from seeking alpha and expected earnings growth from Yahoo Finance. Lastly, we ranked the stocks based on the number of hedge fund holders of each stock, sourced from the Insider Monkey Q3 2024 hedge funds database. Please note that the data for this article was collected on January 17, 2025.
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).
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Dropbox, Inc. (NASDAQ:DBX)
Forward P/E Ratio: 12.67
Earnings Growth: 24.98%
Number of Hedge Fund Holders: 29
Dropbox, Inc. (NASDAQ:DBX) is a cloud-based storage solutions company that allows individuals and teams to manage their work and files securely from anywhere. It is one of the most undervalued tech stocks to invest in now.
The year 2024 was a transitional year for the company. During the fiscal third quarter of 2024 management announced launching Dropbox Dash for Business, an AI-powered universal search tool designed to enhance how teams find, organize, share, and protect their content across various applications. Management is betting highly on Dropbox Dash to bring future growth and profitability as the company is facing a slowdown in its core business. Due to the slowdown in core business, Dropbox, Inc. (NASDAQ:DBX) reduced its employee headcount by 20%, translating to 528 jobs.
The company was able to post stable financial results for the fiscal third quarter of 2024 despite being in a strategic transition. It grew its total revenue by 0.9% year-over-year to reach $638.8 million. Revenue growth was driven by an addition of 19,000 users quarter-over-quarter, which led the annual recurring revenue to $2.579 billion.
Overall DBX ranks 8th on our list of the most undervalued tech stock to invest in now. While we acknowledge the potential of DBX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DBX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap.
Disclosure: None. This article is originally published at Insider Monkey.
