These two attractive tech stocks could be smart long-term investments.
Technology stocks have been a tremendous market performer over the past year, up 33% at the time of writing, thanks to the emergence of a major catalyst: artificial intelligence (AI). Nvidia (NVDA 3.51%) is one of the big beneficiaries of the widespread adoption of AI, with its stock up a staggering 209% over the past year.
NVIDIA's astounding stock price rise is justified by the company's phenomenal growth in revenue and profits. Revenue for fiscal year 2024 (ending January) is expected to grow 126% year over year to $60.9 billion, while non-GAAP (generally accepted accounting principles) earnings rose 288% to $12.96 per share. Analysts expect NVIDIA's revenue to nearly double again this fiscal year to $120 billion.
So it's entirely possible that Nvidia will remain a top tech stock beyond 2024. But Nvidia's stock is currently trading at 77 times its past year's earnings and 50 times forward earnings, higher than the U.S. tech sector average of 47. Nvidia's ability to maintain healthy growth could help justify its lofty valuation, but it's no wonder smart investors are on the lookout for cheap tech stocks that could be future winners.
That's why now is a good time to take a closer look at Dell Technologies (DELL 5.01%) and DigitalOcean Holdings (DOCN -2.42%), two tech stocks that are currently trading at attractive valuations and are poised to continue growing at an impressive pace.
1. Dell Technologies
Dell Technologies shares have risen 172% over the past year as investors buy into the tech specialist on the back of an improving outlook for AI. But Dell shares are down about 25% since hitting a 52-week high at the end of May. Investors are panicking after Dell's financial performance wasn't great last quarter and its outlook for the current fiscal year fell short of expectations.
The good news is that Dell's stock is currently trading at just 1.1 times sales, well below the U.S. tech industry average of 8 times sales. What's more, Dell trades at 27 times trailing earnings and 17 times forward earnings, making it an attractive investment given the potential for accelerating growth.
Dell's full-year revenue outlook is $95.5 billion, which would represent an 8% increase in fiscal 2025 revenue, a significant improvement over its 14% decline in fiscal 2024 revenue to $88.4 billion. Dell attributes the impressive rebound it expects this year to increased demand for its AI servers and a recovering personal computer (PC) market.
Dell's infrastructure business, which includes sales of servers and networking equipment, saw impressive growth last quarter, growing 22% year over year to $9.2 billion. The company is shipping $1.7 billion worth of AI servers in the first quarter of fiscal 2025, up more than 100% from the previous quarter. More importantly, the infrastructure business is likely to remain strong, with the AI server backlog growing 35% quarter over quarter to $3.8 billion.
Meanwhile, Dell's Client Solutions Group revenue was flat at $12 billion last quarter compared to the same period a year ago. But the business is showing signs of turning around as the overall PC market recovers due to greater adoption of AI-enabled PCs. Market research firm IDC predicts PC shipments will grow 2% this year after declining nearly 14% last year.
Not surprisingly, Dell executives noted during a recent earnings call that they are seeing an “improving demand environment” for PCs, a trend that's likely to continue due to additional factors such as aging machines that require upgrades.
As a result, it wouldn't be surprising if Dell's stock price regained momentum and rose again as growth accelerated, which is why investors would be wise to add this tech stock to their portfolios while it's still cheap.
2. Digital Ocean Holdings
DigitalOcean Holdings provides a cloud computing platform that offers both Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS) that developers can use to build, deploy, and scale applications. However, the company's shares have not performed well so far this year, down nearly 5%.
That means investors can get DigitalOcean stock on the cheap, as the company is trading at 4.7 times sales, after briefly surging last month after it reported first-quarter results.
AI has played a key role in this surge, as customers have turned to DigitalOcean's AI-focused cloud services. For example, demand for DigitalOcean's cloud computing solutions used to train AI models has been so high that the company expects demand to outstrip supply.
This also explains why DigitalOcean is seeing improvement in customer spending: The company's average revenue per user (ARPU) increased 8% to $95.13 in the first quarter. The company also raised its full-year revenue growth forecast to a range of $760 million to $775 million, up from a previous range of $755 million to $775 million.
It's likely that DigitalOcean will revise its full-year guidance upwards as the year progresses, as DigitalOcean management has stated that it is “consistently selling available capacity as it comes online.” With demand for cloud AI infrastructure expected to grow at a 31% annual rate through the end of the decade, the company's growth is likely to accelerate going forward as it continues to bring more capacity online to capitalize on this lucrative opportunity.
As you can see in the chart, this is exactly what analysts are expecting.
DOCN Revenue Forecast Data for Current Fiscal Year by YCharts
DigitalOcean's 2024 revenue forecast indicates sales will grow 11%, with growth expected to be at an even faster pace next year and improve further in 2026. However, the company's efforts to grab a larger share of the cloud AI infrastructure market could help DigitalOcean achieve growth that exceeds Wall Street expectations.
That's why DigitalOcean Holdings could ultimately be a smart buy for tech investors: Not only is the company cheaper than big names like Nvidia, it also has solid growth engines that could deliver healthy profits over the long term.
