The stock market is nearing all-time highs: Two stocks that still scream bargains

of S&P500 In 2023, it will rise by about 24% and remain close to its all-time high.of Nasdaq Composite is up 44%, but there is still some ground to cover before the tech-heavy index starts hitting new all-time highs.

This rally has made the stock expensive overall, but there are still some bargains to be found for investors looking for bargains.Here’s why investors should consider international business machine (IBM -0.12%) and digital ocean (DOCN -3.55%) 2023 is coming to an end.

international business machine

Startups building something from scratch are free to run all their workloads on the public cloud and use the generative artificial intelligence (AI) services they need. However, for large companies that have been around for decades or more, the situation is more complex.

Large, well-known companies may run their workloads on a combination of their own hardware and public cloud platforms. They may rely on traditional software or have on-premises databases that support mission-critical processes. And with so much proprietary and customer data, sending it to an untrusted AI service is a recipe for disaster.

IBM serves as a trusted advisor for companies looking to modernize their infrastructure and implement AI technology. IBM uses its software platform and extensive consulting business to provide customers with solutions that reduce cost, reduce complexity and improve productivity. In the AI ​​space, IBM’s watsonx platform allows clients to deploy cutting-edge AI models while minimizing compliance, regulatory, and data privacy concerns.

IBM’s sales this year are expected to rise 3% to 5%, excluding currency effects, and the company plans to generate about $10.5 billion in free cash flow. With a market capitalization approaching $150 billion, IBM has a price-to-free cash flow ratio of 14.

IBM stock has risen about 16% in 2023, but remains well below its all-time high reached more than a decade ago. If the company can generate consistent earnings and free cash flow growth over the next few years, the market may finally be convinced that IBM’s turnaround is real. The combination of free cash flow growth and higher valuation multiples should provide solid returns for investors.

digital ocean

Almost certainly used by the world’s largest companies Amazon web services, microsoft Azure, or another leading platform for your cloud computing needs. With complex requirements and a large IT workforce, navigating a vast and complex cloud platform is not a problem.

It’s a different story for individual developers and small businesses. For a significant portion of the cloud computing market, simplicity is valuable. Small businesses may only need a virtual server and database. AWS and other major cloud platforms have very steep learning curves, and the initial cost of using these platforms is high.

DigitalOcean keeps its platform simple in many ways. The company’s catalog of services is increasingly branching out into managed cloud services that relieve much of the administrative burden for developers. Pricing is also simple and predictable, and there’s little chance of surprise cloud charges if something goes wrong.

DigitalOcean has faced headwinds as customers cut back on spending, but recent acquisitions position it for long-term growth. The acquisition of Cloudways brought high-value customers and managed cloud servers to his DigitalOcean platform, and the acquisition of Paperspace gave the company a user-friendly AI platform.

Although DigitalOcean’s growth is slowing, the cash it generates is increasing. Free cash flow should represent 21% to 22% of 2023 revenue, or about $150 million. DigitalOcean is valued at approximately $3.2 billion and trades at a price-to-free cash flow ratio of 21x.

Considering that DigitalOcean expects its total addressable market to more than double to $195 billion by 2026, this valuation seems not only reasonable but downright cheap. DigitalOcean’s near-term growth rate may be volatile, but the company should be able to achieve double-digit annual revenue growth for many years to come.