It’s been an impressive month thus far for the Nasdaq-100 Index (QQQ), which is en route to the psychological $400.00 level, and now up more than 26% year-to-date. This impressive performance laps an incredible 47% return last year, making this one of the best back-to-back performances we’ve seen since 1995/1996 and 1998/1999. During 1998/1999, the market combined for a two-year gain of ~160%, and in 1995/1996, the index posted a 2-year gain of 84%. However, while the impressive momentum we’ve seen certainly confirms that we’re in a strong bull market, it’s becoming very difficult to find any value out there. Instead, more than 100 stocks are trading at more than 30x sales, and several stocks names are extended from their recent bases. The good news is that there are a couple of high-growth trading at very reasonable valuations, and further weakness should present a low-risk buying opportunity. Let’s take a look at two of these names below:

Both PayPal (PYPL) and Amazon (AMZN) have little in common. The former is a massive mobile payments company, and the latter is an online retailer with one of the world’s most comprehensive cloud platforms: Amazon WebServices. However, both companies do share three key traits:

  • they both boast high double-digit compound annual EPS growth rates
  • they’re both leaders in their respective industries
  • they’re both trading at very reasonable valuations, having not participated in the recent melt-up we’ve seen

This is evidenced by PayPal boasting an impressive 41% compound annual EPS growth rate since FY2015, which beats more than 95% of other US stocks. Meanwhile, Amazon’s compound annual EPS growth rate comes in at 147%, climbing from $1.25 in FY2015 to $43.81 last year. This places AMZN in the top 2% of companies on the US Market from a compound annual EPS growth standpoint, which is even more impressive given its $1.7TT market cap. However, with Amazon recently missing earnings estimates and a hangover from the news that Paypal might acquire Pinterest (PINS), we’ve seen both companies slide to much more reasonable valuations. Let’s take a look below:

As shown in the chart above, PYPL has seen outstanding growth in annual EPS over the past several years, growing earnings per share from $1.10 in FY2014 to $3.88 in FY2020. Based on FY2021 annual EPS estimates of $4.71, the company is on track to grow annual EPS by 24% this year, and 26% in FY2022, which is incredible after lapping a 5-year period where the company has more tripled its annual EPS. However, with PYPL sliding below $226.00 per share, the stock is now sitting at 21x FY2022 earnings estimates vs. a historical PE ratio of more than 47x earnings. One could argue that an earnings multiple of 47 is a little steep given that we are seeing some deceleration in the stock’s compound annual EPS growth rate, assuming it doesn’t beat FY2022 earnings estimates. However, even if we use a lower earnings multiple of 40, PYPL’s fair value based on FY2023 forecasts ($7.35) comes in at $294.00 per share, pointing to more than 30% upside from current levels. With the company just coming off a strong quarter with $300BB in TPV in Q2 and strong transaction growth, this sell-off and hangover following the Pinterest news appear unjustified.

Moving to the technical picture, we can see that PYPL has only tested its 20-month moving average on two occasions since the stock went public, and PYPL is currently sitting right near this level, with the 20-month moving average coming in at $208.00 per share. Obviously, there’s no guarantee that this level holds, but given that PYPL would trade at less than 30x FY2023 earnings estimates if it dipped to this support level, I believe this would present a low-risk buying opportunity. As it stands, PYPL sits more than 7% above this level heading into earnings next week. However, if we were to see the stock sell-off on the report, I believe this might provide a chance to pick up the stock on sale if it dips below $208.00. It’s important to note that this is not a case of an average tech company going on sale, but a case of a high-quality tech name getting beaten up and trading at one of its cheapest valuations since March 2020. This makes the opportunity much more attractive, assuming PYPL dips below $208.00 per share before year-end.

The other name worth keeping an eye on is Amazon, which just came off a softer than expected Q3 report. The company reported a miss on earnings and revenue, with sales coming in $0.85B lighter than analysts hoped for at $110.8BB. In fact, this was the weakest quarter in more than two years from a revenue growth standpoint, with sales up just 15% year-over-year. Unfortunately, this led to a sharp decline in free cash flow ($2.55BB vs. $29.5BB), and quarterly EPS was down sharply year-over-year to $6.12. Worse, the company guided for weaker than expected Q4 and much softer earnings per share, with much higher costs than expected in the period due to labor supply shortages, increased wage costs, and increased freight/shipping costs.

However, the long-term outlook has not changed despite the rough report, and AMZN is actually flat since reporting this quarterly miss. Often, when companies report a much weaker quarter than planned and immediately regain their losses, this means that the softer than expected results were already baked into the stock. This means that the market had telegraphed the miss, given that it was quite obvious the company would see higher costs due to the impacts we’re seeing across the retail industry. This would certainly explain the stock’s underperformance over the past several months while names like Netflix (NFLX) have broken out of massive bases, up nearly 20% from July levels. Besides, on a valuation basis, even if FY2021 EPS is set to be much weaker than projected with single-digit annual EPS growth, it’s important to note that AMZN grew annual EPS by more than 80% last year. Given these tough year-over-year comps and the headwinds we’re seeing, any growth in annual EPS is impressive.

If we look ahead at the longer-term earnings trend, though, which is what should matter most for investors, AMZN is expected to nearly double annual EPS from FY2021 levels by FY2023 ($80.25 vs. $43.42). Even if we assume a conservative earnings multiple of 55x earnings, the fair value for the stock looks to be closer to $4,173, pointing to more than 20% upside from current levels. Generally, I prefer at least a 25% discount to fair value, so I don’t see any reason to rush into AMZN just yet. However, if we were to see the stock slide closer to $3,130 per share before year-end, I would view this as a low-risk buying opportunity. Over the past ten years, AMZN has traded at an average PE ratio of 77, hence why I would argue 52 is a relatively conservative multiple.

Looking at the technical picture, we can see that AMZN has very clearly defined support between $2,800 and $2,950, with horizontal support and a long-term uptrend line coming in near this zone. So, a pullback towards $3,100 would not only be supported by the fundamentals with a margin of safety baked into the stock but it would also be supported by the technicals, with support coming in just 7% lower. In summary, I would be keeping a close eye on the $3,000 – $3,100 level if we do see AMZN re-test the bottom of its current base.

While Bitcoin, Tesla, and many other names are much more popular picks currently given their recent performance, PYPL and AMZN look much more enticing to me, given that I prefer to buy great companies when they’re out of favor, not when they’re extended from their recent breakouts. Despite the sharp pullbacks we’ve seen in AMZN and PYPL, they remain in long-term uptrends, suggesting that further weakness should present a buying opportunity. So, if we see PYPL dip below $208.00, or AMZN below $3,130, I would view this as a spot to look at starting a position in each stock.

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