The Nasdaq Composite(NASDAQINDEX: ^IXIC) closed more 10% from its record high on March 26, primarily because recession fears have resurfaced as a result of soaring oil prices. That put the index in correction territory.
However, corrections have typically been great buying opportunities. Over the past 15 years, the Nasdaq has returned an average of 22% in the 12-month period following its first close in correction territory. Investors looking to capitalize should consider Micron Technology(NASDAQ: MU) and AppLovin(NASDAQ: APP).
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C.J. Muse at Cantor Fitzgerald has set Micron with a target price of $700 per share. That implies 98% upside from its current share price of $352.
Jason Bazinet at Citigroup has set AppLovin with a target price of $820 per share. That implies 115% upside from its current share price of $380.
Importantly, while those forecasts are some of the most optimistic on Wall Street, most analysts following the companies believe Micron and AppLovin are undervalued. Here are the important details.
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Micron develops memory and storage solutions for personal computers, mobile devices, data center servers, and automotive systems. The company specializes in DRAM memory products, including high-bandwidth memory (HBM), and NAND flash memory products. All three types play an important role in powering artificial intelligence (AI) systems.
Memory chip prices have skyrocketed in recent months because of a critical supply shortage. Manufacturers were hesitant to build additional production capacity following the post-pandemic supply glut, so they were caught flatfooted by the tremendous demand that has accompanied the AI infrastructure buildout. Micron, the third largest supplier of DRAM and HBM, and fourth largest supplier of NAND, has been a major beneficiary.
Revenue nearly tripled in the last quarter, driven by particularly strong growth in the data center segment. “Micron set new records across revenue, gross margin, EPS, and free cash flow in fiscal Q2, driven by a strong demand environment, tight industry supply, and our strong execution,” said CEO Sanjay Mehrotra. “We expect significant records again in fiscal Q3.”
Micron trades 23% below its high despite that goods news. The memory chip industry is notoriously cyclical, meaning it oscillates between supply shortages, which cause prices to increase, and supply gluts, which cause prices to fall. However, while investors are right to be warry about the durability of the current supply shortage, I think excessive wariness has created a buying opportunity.
Wall Street expects Micron’s adjusted earnings to increase at 13% annually through fiscal 2029. That makes the current valuation of 16 times adjusted earnings look reasonable. In fact, most analysts think the stock is deeply undervalued at its current price. The median target price of $550 per share implies 56% upside from the current share price of $352.
AppLovin develops ad tech software for advertisers and publishers. While the company has traditionally focused on mobile gaming, it recently expanded into web-based ads, targeting e-commerce businesses with its new self-service platform. CEO Adam Foroughi says the platform will serves the “foundation for our next decade of growth.”
AppLovin trades 48% below its high for several reasons, none of which seem particularly credible. Investors are concerned that AI will disrupt traditional advertising business models, but the company is arguably on the forefront of AI innovation within the industry because of Axon, machine learning software that targets ad content.
Indeed, Morgan Stanley analyst Matthew Cost has called Axon a “best-in-class machine learning ad engine.” And Morningstar analyst Mark Giarelli says AppLovin delivers a much higher return on ad spending compared to competitors Meta Platforms, TikTok, Pinterest, Snap, and Alphabet‘s YouTube.
Meanwhile, at least three short-sellers have accused Axon of stealing data from Meta and Alphabet, and the SEC has launched a probe into its data collection practices. Investors should monitor the situation, but AppLovin has denied wrongdoing, and several analysts have pushed back against the claims.
Wall Street estimates that earnings will increase at 44% annually through 2027. That makes the current valuation of 38 times earnings look downright cheap. AppLovin shareholders may not see triple-digit returns in the next year, but most Wall Street analysts think the stock is deeply undervalued. Among 32 analysts, the median target price is $650 per share. That implies 71% upside from its current share price of $380.
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Citigroup is an advertising partner of Motley Fool Money. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms, Micron Technology, and Pinterest. The Motley Fool has a disclosure policy.
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