He S&P 500 It has risen around 24% in 2023, hovering around its all-time high. He Nasdaq Composite is up 44%, although the tech index still has some ground to cover before it starts hitting new all-time highs.
This rally has made stocks more expensive overall, but there are still some good deals for investors looking for a bargain. Here's why investors should consider International business machines (NYSE: IBM) and Digital Ocean (NYSE: DOCN) as 2023 comes to a close.
International business machines
A startup building something from scratch is free to run all of its workloads on public clouds and use any generative artificial intelligence (AI) services it wants. But for a large company that has been around for decades or more, things are more complicated.
A large, historic enterprise may be running workloads on a combination of its own hardware and public cloud platforms. You may rely on legacy software or have on-premises databases that support mission-critical processes. And with a lot of customer and property data, sending it to an untrusted AI service is a recipe for disaster.
IBM plays the role of trusted advisor for companies looking to modernize their infrastructures and adopt artificial intelligence technology. Using its software platforms and vast consulting business, IBM offers clients solutions that reduce costs, reduce complexity and increase productivity. In the field of AI, IBM's Watsonx platform enables customers to deploy cutting-edge AI models while minimizing compliance, regulatory, and data privacy concerns.
IBM's revenue should grow 3% to 5% this year excluding the currency impact, and the company plans to generate about $10.5 billion from Free cash flow. With a market capitalization close to $150 billion, IBM trades with a price-to-free cash flow ratio of 14.
While IBM stock is up about 16% in 2023, it remains well below its all-time high reached more than a decade ago. If the company can produce consistent revenue and free cash flow growth in the coming years, the market may finally be convinced that IBM's turnaround is real. A combination of free cash flow growth and a higher valuation multiple should generate solid returns for investors.
Digital Ocean
The world's largest companies will almost certainly use Amazon Web services, microsoft Azure or another major platform for your cloud computing needs. With complex requirements and armies of IT workers, navigating a vast and complicated cloud platform is not a problem.
For individual developers and small businesses, the story is different. Simplicity is valuable to a considerable portion of the cloud computing market. A small business may only need a virtual server and database. Because AWS and other major cloud platforms have such steep learning curves, the upfront costs of using those platforms are high.
DigitalOcean keeps its platform simple, in more ways than one. The company's service catalog is short and has increasingly diversified into managed cloud services that remove much of the administrative burden for developers. Pricing is also simple and predictable, with little chance of receiving a surprise bill in the cloud when something goes wrong.
DigitalOcean faces some headwinds as customers reduce spending, but recent acquisitions lay the groundwork for long-term growth. The acquisition of Cloudways brought high-value customers and managed cloud servers to DigitalOcean's platform, and the acquisition of Paperspace gives the company an easy-to-use AI platform.
DigitalOcean's growth has slowed, but the company is generating an increasing amount of cash. Free cash flow should represent 21% to 22% of revenue in 2023, or about $150 million. With DigitalOcean valued at around $3.2 billion, the price-to-free cash flow ratio sits at 21.
Given that DigitalOcean expects its total addressable market to more than double to $195 billion by 2026, that valuation not only looks reasonable, but downright cheap. DigitalOcean's growth rate in the near term may be volatile, but the company should be able to achieve double-digit annual revenue growth for many years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. timothy green He has positions in DigitalOcean and International Business Machines. The Motley Fool ranks and recommends Amazon, DigitalOcean, and Microsoft. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
Stock Market Near All-Time High: 2 Stocks Still Screaming Bargains was originally published by The Motley Fool
