2 Undervalued Stocks to Buy Right Now

Welcome back to the channel, everyone. Uh today, my co-host Neil and I are going to be breaking down two undervalued stocks to buy right now. But, before we reveal the tickers, I think we have to address uh the obvious reality, which is that by almost every standard metric, the stock market is absolutely not undervalued right now. Uh you know, we are in the midst of a huge investment boom that's driven by AI infrastructure spending, really strong uh stronger than expected corporate earnings growth. I mean, we're in a time where companies are funneling capital into physical infrastructure, automation, supply chain reshoring. And they're doing this through macro bottlenecks like elevated energy prices, global interest rate cycles, and even geopolitical friction. But, just to put some numbers to this, if you look at the S&P 500 trailing PE ratio, it's currently sitting at around 30. That's about 15% above its historical long-term average. And even looking forward, you know, expectations, the forward PE is elevated over 20. And a lot of this is as tech spending, AI tailwinds have pushed broad market valuations to near peak levels. So, finding true value right now, you really have to dig much deeper than just scanning the basic screeners. And that equal-weighted S&P 500 looks very different from the market cap-weighted index everyone is seeing right now. And I think also one of the things that maybe people are missing right now, I mean, we're already seeing Wall Street analysts pricing in incredibly aggressive earnings growth up to 21% growth for the index overall. So, expectations are very high. There's very minimal margin for error. And if even one of the big tech companies misses a milestone, the whole index feels it. >> Yeah, and I do think and I I'll pull it up, I've seen that the large majority of companies that reported this earning season have beaten top and bottom line. So, that's definitely an encouraging uh stat to know. Cuz yes, historically we might have been, let's say, cheaper. But, I would also say that right now we do have a lot of companies that are super profitable. Well, the super profitable companies are now in a spending cycle. So, when you really look at free cash flow margins and things like that, it looks a bit a bit bad, but the quality of these businesses are doing much better than 26 years ago. I think margins are higher as well. We have more software companies, high-tech companies that do dominate. So, maybe paying a slight premium makes sense. >> Yeah, I think that's right. And the other thing to note is that when we're talking about looking for undervalued businesses, it's really important to separate an undervalued company from a value trap, right? Because the stock isn't a buy just because maybe its price has crashed or it has a low PE ratio. You know, there can be structural issues that can lead to a low valuation multiple. You know, revenue growth slowing, you know, you're looking at maybe a business model that has cracked. So, Neil and I today, you know, we're not just looking for quote-unquote cheap stocks. We're really looking for businesses with competitive quality that we think their intrinsic value, that they're trading at a significantly lower intrinsic value right now, maybe because of short-term market fears or or temporary headwinds. But these are businesses that we think have really exceptional economic moats and that long-term earnings power. >> Now, before we continue with today's episode, if you want market-beating stock picks from our analyst, make sure to check out the pinned comment and the description. Using that link gets you a promotional offer as our thanks for being a viewer. Thank you and let's get back to today's episode. >> Yes, so the first company I want to cover, and by the way, going back to the point that you did say, it it is true cuz cheap can become cheaper and low can go much lower. I have some personal experience with a certain fintech name, maybe some of the viewers know who that one is. It rhymes with Pain pal. Um but but uh today I want to start off with a social media / advertising company. No, it's not Meta. I know, I like to talk about Meta, but this time I'm talking about another one, which is Reddit. Now, Reddit, why is it undervalued to me? Reddit right now is a company worth around $29 billion, has a trailing PE of 35.6 times, but a forward one of 21.3 times. Now, of course, the forward PE or any forward multiple is just based on analyst expectations, and of course, analyst expectations, they do change every single uh quarter. Year-to-date, the stock is down 36.7%, and over the past 12 months, the stock is down 30.4%. Now, Reddit, while you might only look at the stock and say, "Oh, the company is definitely not doing well." Well, actually, the it's the contrary. The company has grown revenue by over 60% for the last X quarters, so the growth is definitely there. The market is still expecting this company to grow quite rapidly over the foreseeable future. Not only that, we are also seeing that this company generates more and more free cash flow. It is becoming more profitable. Now, why is it cheap today? Well, it's cheap today because the market fears that well, uh Google AI overviews or ChatGPT, these types of AI chatbots are stealing traffic or are taking traffic away from Reddit's website, and Reddit themselves have said that they've seen search traffic, Google traffic come down a little bit. Now, despite that, they still grew revenue by 60% last quarter. So, there is a good thing, there is a bad thing. Now, to tackle the loss of Google traffic or the loss of traffic in general to these types of AI chatbots is to make sure that they get paid through data licensing deals. Now, we've had a data licensing deal, we've seen those. But if Reddit's data is so valuable you would think they would renew it and get paid even more. I Google pays tens of billions of dollars to to Apple, uh to Samsung as well. To Reddit, it's not going to be tens of billions of dollars for their data, but it could be hundreds of millions of dollars and that could of course boost the company because those are high-margin dollars. Then if we purely look at the core business itself, let's say let's say they they do get hit by traffic a little bit. The average revenue per user for a Reddit sits at around $6 and some change. If you compare that to a Meta, Meta sits at close to $40 or so. So, the average revenue per user expansion can already be part of of the core thesis here because if yes, if through AI we've seen with Meta for example, recommendation systems becoming better and better, Reddit could do the same. They are refreshing the way the feed works as well. So, clearly average revenue per user is already a big a bullish part of of the thesis. Now, of course, execution is key. They are also going to try to do things with video. We know that video has been doing excellent on YouTube, Instagram, TikTok. So, if they can if they can figure this out, if they can make sure that advertisers like the return on ad spend, I think this is truly an undervalued business as of right now, but there is definitely execution risk, which is probably why the stock is down around 30% this year. >> One of the things that's kind of interesting to think about is, you know, what success looks like for a company like this. You know, maybe they won't have that 60% plus revenue growth, you know, 5 10 years from now, but, you know, 30 40% for a more mature company at that point that would be, you know, 30 years old almost at that time. I think that that would also be a compelling growth story. And you think about Reddit and how it's historically worked. It has been that go-to third space for so many people around the world to congregate on the topics or ideas or, you know, real-life events that are happening to discuss that and to socialize in that way online. And that has essentially been the purpose of Reddit from the very beginning. And from a the AI side and looking at how that the company and that business model translates into the sort of new growth era, that also creates an incredible wealth of data for these companies that need to build and train their models. And having historically been that third space and continuing to be, I do think Reddit can maintain its relevance and its utility to these companies, you know, moving forward. I mean, they've also really been able to use AI to boost their advertising business. You know, they have been able to drop very targeted ads specifically inside, you know, comment sections to help kind of match products with real-time user intent. They've been using AI to translate a lot of the the different Reddit threads, which of course has unlocked more international user growth. They're scaling much faster outside of the US than a lot of the other social apps. And so, I do think there's a lot of ways for them to win. Obviously, you know, selling that data to the likes of Alphabet, no pun intended, provides a lot of upfront cash, but I do think there are other ways as well for them to grow. I agree with you about some of, you know, the risks here. I think there is a lot to watch in terms of how they're able to continue monetizing this going forward. Another thing to consider, you know, Reddit's traffic relies a lot on how Alphabet indexes its links, or Google, I should say, owned by Alphabet. And so, if we see a change in, you know, algorithms or, you know, the constant summarizing of posts using AI snippets, maybe that could lead to a drop in traffic, but at least what now in these early reports that are coming out after we're seeing all of these AI changes and updates that, you know, Alphabet has released and others, this seems to be a business, Reddit, that is still actively monetizing their data and their user base, and they're doing it in a profitable way. And so, I do think that that makes it a much more interesting company from my perspective to watch, or at least, you know, put on your watch list, than maybe even a few years ago. >> I understand it, and I need to view it as to understand it as well. There will always be people that prefer to look for answers, Google search, AI overviews, ChatGPT, and that's good enough. Well, there's also always going to be the other side where one answer is not enough, where, okay, you see the answer, but you want to learn more, you click the link, maybe you want to have the discussion, maybe you want to look at other people's opinion in a a Reddit thread. So, there's always going to be those two camps. But at the end of the day, I want to see continuous execution from the business. If their data is truly extremely valuable, I do think that they deserve to get paid, and we'll see. We'll see what happens over the upcoming months. Now, Rachel, I know you have one very exciting company you want to talk about. I love that company, so it's going to be a good discussion. >> Well, I'm going to talk about Alphabet. Um this is a company I've been a shareholder in for many years. You know, the stock is trading at a trailing price to earnings ratio of right around 17 at the time we're recording this video. And it's important to put some perspective on this. I mean, Alphabet shares actually hit an all-time high back in May of this year. And at that point they shares of Alphabet had soared more than 150% in the prior year. So, they were among the 25 best performers in the S&P 500 index over that stretch, far outpacing a lot of the Mag 7. Now, since that time we've seen Alphabet fall double digits from its peak. They've lost about 700 billion in market values. This has been a major drag on the S&P 500 in that span. And there's some reasons for that. There's been concerns about whether the, you know, intense CapEx that they are are leveraging is actually improving their standing in the AI race. Obviously, like all of the other Mag 7, they're spending on building out the infrastructure to develop their technology. You know, they lost a couple top employees to Anthropic and OpenAI. There's been some concern about that. Um, you know, there's been some delays about their powerful AI model Gemini 3.5 Pro, although they did release the 3.7 flash model, which has been, you know, one of the fastest growing models to date. They've seen their Gemma models surpass a billion downloads. So, I want to talk a bit about what's happening here. We're talking about some of the numbers in terms of, you know, the value that the market cap has lost. And a lot of the spending that Alphabet's doing right now, it's about making their tech faster. It's about cutting down the cost of running AI. You know, in their most recent quarter Alphabet's revenue hit $120 billion. That was a 24% year-over-year increase. Google Cloud grew 82% to $25 billion. Um, now their infrastructure spending doubled to about $45 billion. Um, and of course we're also seeing this across these other big tech companies. Now, unlike a lot of the other tech giants, Alphabet doesn't just buy all its AI chips from other suppliers. They are building their own custom AI chips called TPUs. And because they're they build their own hardware, they are able to handle a lot of the AI workloads and Gemini responses for a fraction of what it cost their competitors. They They are still reliant on outside chips to be clear, but these tensor processing units, these TPUs, are really, really key, I think, to their competitive advantage long-term. And it's changing the core business. I mean, obviously, search is what they're known for through Google search. They have really overhauled their traditional search engine into this active AI answer machine. You know, AI overviews, obviously, is one example. And so, they are pushing up their search ad revenue. That grew 17% to over $63 billion in the last quarter. Um Google Cloud's profits have tripled to about $9 billion. That's because, you know, Alphabet is using its AI models to help, you know, millions of businesses automate their ads. And they're also on the enterprise side, uh helping their clients on Google Cloud. And so, they are proving that their heavy spending is bringing in that high margin revenue right away. And then, you know, one final note I'll look at, we also look at a business that uh controls one of the largest media and streaming operations in the world, YouTube, right? YouTube accounts for about 30% of Alphabet's entire market value. So, this is a company I continue to be extremely bullish on. I think you're getting one of the most profitable businesses um in their industry at a very favorable valuation right now. I certainly don't think the pressure that we see have seen on the stock recently has been warranted, but maybe that's an opportunity for investors, too. >> I mean, I couldn't agree more. In 2025, I was talking about Alphabet maybe one too many times, as some some viewers might have noticed last year, but it it was extremely undervalued last year in my opinion. You're getting a lot of value right now as well. Yes, of course the stock is much higher. Yes, it's worth more than $4 trillion, but as you said, cloud revenue accelerates. Not only does it accelerate, but margin expands as well at the same time. You've got a backlog that continues to grow and grow. You've got them controlling basically everything that they own. TPUs, data center software, you name it. And so, I do think that in a world where we might not know who completely wins in AI. We we did talk a lot about Nvidia over the past couple of days, but let's say we are going to have maybe a correction of some sort. Who knows over the next 2 years? Just speculating here. Super profitable companies like a Google Alphabet are going to come out of this situation as much stronger companies because well, they could then go and shop around and see okay, you're a great company. You seem to be struggling right now. We might just acquire you for 70 cents on the dollar or something like that. They can do it because okay, right now maybe free cash flow is again under pressure, but to the core it is a extremely profitable business. >> Well, thank you for joining us today, guys. That wraps up our two undervalued stocks for today. Let us know in the comments below which of these companies you might be interested in buying right now. If you think any of them are actually value traps and you completely disagree with our thesis, let us know that in the comments, too. We we love to interact with you guys and make sure to hit that subscribe button, turn on notifications, and Neil and I will see you all in the next video.