Buying cheap stocks isn’t the secret path to wealth in the stock market. If that was all that investors had to worry about, it would be incredibly easy to make money. Stock screeners can show which stocks are the cheapest. So investors would only need to buy whichever stocks the screener said were the best value right now.
In reality, most stock valuation metrics measure the stock price against past financial results. Investing is about the future. But even the stock valuation metrics that are forward-looking are flawed, because they’re based on estimates — and estimates are often wrong.
Therefore, investors need balance when it comes to buying cheap stocks. The valuation is important. But having a good idea of what’s happening in the world and what could happen with the business over the next five years or so is important as well.
Valuation isn’t everything. But financial technology (fintech) company PayPal Holdings (NASDAQ: PYPL), e-commerce marketplace Etsy (NASDAQ: ETSY), ride-sharing platform Lyft (NASDAQ: LYFT), and shoe business Crocs (NASDAQ: CROX) are four objectively cheap stocks. From a price-to-free-cash-flow perspective, PayPal is the most expensive at a ratio of just 13. That’s cheap, and it only gets cheaper from there for this quartet, as the chart below shows.
These four stocks are cheap because investors aren’t optimistic about these businesses from here. But I believe they’re not giving them enough credit. Here, I’ll highlight just one thing that could go right with each company, providing a potential boost to the business. If business results improve, then these four stocks are simply too cheap to ignore.
Perhaps you’ve heard that the fintech space is competitive. It’s true. While PayPal has long had a commanding presence with its consumer fintech business through its PayPal brand and with its Venmo app, its aggressive push into enterprise fintech services in recent years came at a cost to its profits.
One of PayPal’s big enterprise products is Braintree, an unbranded checkout service used by many big businesses. To secure customers, it appears that the company was willing to undercut the competition. But shortly after joining PayPal in 2023, new CEO Alex Chriss realized changes needed to be made.
Under Chriss’ leadership, PayPal has started renegotiating Braintree contracts, which has lifted its profit margins. It’s so early in the journey that the improvements are barely perceptible. But the chart below shows that after years of flatlining, both its gross profit and free cash flow have risen recently.
Trading at just 13 times its free cash flow, PayPal stock is far too cheap if its Braintree business yields more improvements in the coming year and beyond.
From the third quarter of 2023 through Q3 2024, active buyers on all of Etsy’s platforms went from 97.3 million down to 96.7 million — it lost users. Gross merchandise sales in Q3 were $2.9 billion, down from $3 million in the prior-year period. In short, there’s no growth, and Etsy stock is consequently cheap.
Can Etsy return to growth? It certainly does have room. Management is ratcheting up its marketing to reflect how its marketplace can be used for buying gifts for family and friends. Management estimates this to be a $200 billion addressable market in the U.S. alone, and Etsy only commands a small percentage of this market today.
Etsy is currently generating substantial free cash flow ($687 million over the trailing 12 months) and is using it to buy back stock. This is something that can boost shareholder value and is worth considering on its own. But if management’s efforts to take a bigger portion of the gift market start paying off, it’s possible for the company to get back to growth, making the stock a good bargain today.
Like PayPal, Lyft’s business is being looked at with fresh eyes by new management. The company went public in 2019 and had negative free cash flow every year from then through the end of 2023. But things started changing after board member David Risher was named the new CEO.
In Risher’s first earnings call as CEO, he said: “I am very aware our current levels of growth and profitability are not acceptable.” It wasn’t long before revenue growth picked up steam (higher prices played a part), operating expenses dropped, and stock-based compensation came down. The business’ finances were completely changed in short order.
After negative free cash flow of $248 million in 2023, Lyft is on pace to have positive free cash flow in 2024 — its first full calendar year of positive cash flow. As of Q3 2024, the company has a stunning $641 million in free cash flow on a trailing 12-month basis. But management isn’t done. It intends to reach $900 million in free cash flow in 2027.
For perspective, Lyft has a market capitalization of $5.6 billion as of this writing. Consider that it’s not unreasonable for a stock to trade at 15 times its free cash flow. Assuming it generates $900 million in 2027, Lyft would be worth $13.5 billion if it traded at 15 times that cash flow. That’s a 140% gain from where it trades right now.
Considering how quickly this ride-sharing business made progress under new management, I wouldn’t bet against Lyft’s ongoing rise.
Captain Obvious knows that Crocs the company makes Crocs the shoes. This has turned into a great business in recent years. Not only are sales of Crocs’ clog-style shoes growing, it’s also quite profitable. The company’s operating margin for 2024 should be around 25%, up significantly from where it was several years ago.
Captain Obvious might not know that Crocs also owns the HeyDude shoe brand — an underperforming line that’s holding back progress. The company acquired HeyDude in 2022, hoping to elevate it to the same sales and profits as the Crocs brand. That hasn’t panned out.
Through the first three quarters of 2024, HeyDude’s revenue is down 17% from the same period of 2023. And margins haven’t come up to the same level as margins for the Crocs brand. However, Crocs stock is a good buy in spite of this headwind. It’s on pace to earn well over $1 billion in adjusted operating income, which it’s using to reduce debt and repurchase shares.
Crocs stock is attractive as is. But if 2025 is finally the year that the HeyDude brand starts living up to its potential, this stock could really soar to new heights.
PayPal, Etsy, Lyft, and Crocs are far from businesses in decline. On the contrary, I believe all four can surprise investors with growth and profit improvement in the coming year and beyond. That’s why I like all four of these stocks today at these incredible value prices.
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Jon Quast has positions in Crocs, Etsy, and Lyft. The Motley Fool has positions in and recommends Etsy and PayPal. The Motley Fool recommends Crocs and recommends the following options: long January 2027 $42.50 calls on PayPal and short March 2025 $85 calls on PayPal. The Motley Fool has a disclosure policy.
4 Stocks That Are Too Cheap to Ignore was originally published by The Motley Fool
