Domestic stocks aren’t particularly cheap by historical standards, but through a historical lens, U.S. equities aren’t alarmingly overvalued. Still, some investors might think it’s difficult to find credibly undervalued names.
They may also be apt to think that the task is even harder with ETFs such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM) because the funds hold a variety of high-growth stocks, many of which are rarely, if ever, associated with value.
Following the “SaaS-pocalypse,” the colloquialism describes the recent plunges in various software stocks. This includes some QQQ/QQQM holdings – there are some bargains to be found in the technology sector. Believe it or not, according to Morningstar, some QQQ/QQQM member firms are now downright undervalued, indicating there’s more of a value case than meets the eye with these ETFs.
Adobe (ADBE) is one of the names viewed as most vulnerable to artificial intelligence (AI). Still, following its recent drubbing, the QQQ/QQQM holding is undervalued, and some analysts see rebound potential.
“Adobe believes it is attacking an addressable market well in excess of $200 billion,” notes Morningstar’s Dan Romanoff. “The company is introducing and leveraging features across its various cloud offerings. This will drive a more cohesive experience, win new clients, upsell users to higher-priced solutions, and cross-sell digital media offerings. We expect M&A efforts will continue to bolster all aspects of Adobe’s portfolio, which it surely will do to defend against emerging competitors.”
TurboTax owner Intuit (INTU) is another example of a QQQ/QQQM holding that’s been taken to task on fears of AI disruption. It’s also now undervalued, and it has more upside levers than investors are giving it credit for.
“TurboTax Live is Intuit’s assisted tax-filing experience that connects individual users with tax accountants in real time,” observes Morningstar’s Luke Yang. “Intuit also offers QB Live and Mailchimp Live, matching small businesses with accounting or marketing professionals. We think both mechanisms have become Intuit’s key differentiators from competitive offerings that are incremental to the company’s moat.”
Don’t forget Microsoft (MSFT), the third-largest holding in QQQ and QQQM. While not a value stock in the traditional stock, it trades at a 34% discount to Morningstar’s fair value estimate.
“Microsoft is also shifting its traditional on-premises products to become cloud-based SaaS solutions. Critical applications include LinkedIn, Office 365, Dynamics 365, and the Power platform, with these moves now beyond the halfway point and no longer a financial drag. Office 365 retains its virtual monopoly in office productivity software, which we do not expect to change in the foreseeable future,” adds Romanoff.
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