Some investors believe that "cheap" tech stocks with low P/E ratios have low price growth potential. While that may be true for mature tech stocks like IBM or Intel, investors often overlook some lesser-known plays with decent growth and low valuations. Let's take a closer look at three such stocks -- MeetMe (NASDAQ: MEET), Fabrinet (NYSE: FN), and Web.com (NASDAQ: WEB).
Image source: Getty Images.
MeetMe is a social networking service that helps people find new people to chat with. Earlier this year, it acquired Skout, a similar platform, for $28.5 million in cash and 5.37 million common shares of MeetMe. Together, the two platforms have over 8.5 million monthly active users (MAUs), with a large presence among millennials.
MeetMe is tiny compared to Match Group's Tinder, which has about 50 million MAUs. But it's still growing rapidly -- mobile monthly active users rose 32% annually last quarter, boosting its mobile revenues by 39% to $16 million. Total revenues (mainly from in-app ads) grew 20% annually to $17.2 million, non-GAAP earnings rose 30% to $6.2 million, and GAAP earnings soared 316% to $4.4 million.
Looking ahead, analysts expect MeetMe's revenue and earnings to respectively rise 38% and 17% next year. Despite those solid growth estimates, MeetMe trades at a mere 7 times trailing earnings and 10 times forward earnings, compared to the industry average P/E of 50 for internet information providers.
Image source: Google Play.
Fabrinet supplies packaging and optical, electro-mechanical, and electronic manufacturing services to OEMs of industrial lasers, medical devices, automotive modules, semiconductors, and various other products. Robust demand for those services enabled Fabrinet to post double-digit annual sales growth for eight consecutive quarters. Its optical business, which accounts for about three-fourths of its revenue, has benefited from the 100-gig upgrade "super cycle" among telecom companies worldwide.
Fabrinet's revenue rose 53% annually to $332 million last quarter, compared to 14% growth in the prior-year quarter. Its non-GAAP net income rose 78% to $0.80 per share, and GAAP net income soared from $0.06 a year ago to $0.61 per share.
Analysts expect that impressive growth to continue with 38% sales growth and 51% earnings growth this year. Fabrinet trades at just 19 times earnings, which is slightly higher than the industry average of 17 for electronic equipment companies, but its forward P/E of 12 indicates that it remains cheap relative to its growth potential.
Web.com provides domain registration services, web-hosting services, website design and management, and marketing campaigns for small businesses. It's basically an all-in-one shop for any small company that wants to build a website and establish a web presence.
The stock plunged after Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google entered the domain registration market two years ago. Yet Web.com survived that assault, held its niche, and posted double-digit annual sales growth for the past three quarters. Its revenue rose 37% annually to $192.8 million last quarter, compared to a 0.4% decline in the prior-year quarter.
Much of that growth was attributed to its purchase of digital marketing company Yodle earlier this year. Web.com also believes that stacking on more value-added services (like design and marketing) will widen its moat against bigger players like Google. Non-GAAP earnings improved 23% annually to $0.76 per share last quarter, but GAAP earnings fell 42% to $0.07 per share (partly due to the acquisition). Looking ahead, analysts expect Web.com's sales and earnings to respective rise 3% and 6% next year. Those numbers look mediocre, but the stock trades a just 6 times forward earnings -- which compares very favorably to its industry average of 50.
The key takeaways
MeetMe, Fabrinet, and Web.com look fundamentally cheap, but investors shouldn't ignore the risks. MeetMe could easily be overshadowed by Tinder and other bigger dating apps in the future, Fabrinet's revenue growth could slow if telcos delay upgrades of optical networks, and Web.com could be boiled alive if Google turns up the heat. Therefore, investors should do their due diligence on these stocks to see if those risks outweigh the rewards.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors.