The technology sector's rally has continued in 2020, bucking pressures created by the coronavirus pandemic and gaining favor as a defensive refuge despite many companies in the space having growth-dependent valuations. The sector's strong performance has helped lift the S&P 500 index level to flat on the year following March's virus-driven crash, and technology's staggering resilience is even starker when compared to performance for value-based indexes and funds that have typically been sturdier in volatile markets.
Tech's stellar run may cause some investors to wonder if valuations have become stretched, but the sector's market-shaping gains reflect the long-term direction of a changing global economy -- and many technology players remain cheaply valued. Huya (NYSE: HUYA) and Baozun (NASDAQ: BZUN) are two companies with attractive metrics, relatively small market capitalizations, and big growth potential. Here's why they have what it takes to deliver tremendous returns for your portfolio.
Huya stock is up roughly 20% over the last month, but the company still looks significantly undervalued in the context of its strong business performance and growth potential. The China-based company operates a platform for video game broadcasts and commentary, and it's got a leading position in a market that looks primed for rapid expansion.
Close followers of the video game industry are probably aware that gaming has become in demand as spectator entertainment content. However, the idea that hundreds of millions of people around the world spend hours a week watching other people play games is surprising to many, and the content category's growth potential remains underappreciated. The market also isn't giving Huya's individual business performance nearly enough credit.
The company generates sales from taking a cut of donations that viewers make to broadcasters and from in-stream advertisements, and business is booming. Huya's revenue jumped 47.8% year over year in the first quarter, and non-GAAP adjusted net earnings soared 100.7%.
As an indication that Huya's performance isn't reflected in its stock price, consider that its price-to-earnings growth (PEG) ratio sits at just 0.2 even after the recent rally for the company's share price. A PEG value below one tends to be an indication that a stock is undervalued, so Huya is looking pretty good on that front.
Outside of the company and its services not being well known to many investors, an uncertain regulatory climate is the other big factor in Huya's valuation lagging its stellar sales and earnings growth. It's reasonable to expect that China's government will continue to implement stricter standards for online content, and companies based in the country may eventually have to meet new requirements if they wish to remain listed on U.S. stock exchanges. Political relations between the U.S. and China are outside the company's control, but Huya's strong growth in markets outside of the Chinese market means the company is becoming sturdier and more diversified.
With strong momentum and big room for growth, Huya stock still looks cheap trading at roughly 32 times this year's expected earnings.
Baozun is sometimes referred to as "the Shopify of China" because both companies provide software platforms that help businesses run e-commerce websites. That comparison may have immediate appeal if you've been following Shopify stock, which is up roughly 133% this year alone and a staggering 2,700% over the last half-decade. Baozun might sound even more appealing if you take into consideration that China is by far the world's largest online retail market, and the space is still growing at a rapid clip.
The company operates a software ecosystem tailored to helping large Western brands enter and thrive in China's massive e-commerce industry. Offering everything from website creation to customer management services to warehousing and order fulfillment makes Baozun a one-stop shop for a company's e-commerce needs in the market, and partnerships with many of China's biggest online retail and social media leaders mean that its brand partners can have their stores featured through the country's biggest commerce and communication portals.
With more brand partners coming on board and Baozun receiving a cut of sales conducted through its platform, the company is set up to enjoy online retail industry tailwinds through the next decade and beyond. The e-commerce software specialist also offers a specialized platform for small enterprises, which could turn into a major long-term growth driver as the Chinese middle class grows and more people start businesses.
Baozun has a forward PEG of 0.3 and trades at roughly 30 times this year's expected earnings. The company's valuation of $2.8 billion leaves plenty of room for growth, and shares purchased today will likely wind up looking very cheap a few years down the line.
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