2 Wide-Moat Stocks That Are Drop-Dead Bargains Right Now

Cheap stocks aren't easy to find these days.

In the fourth year of the AI bull market, the S&P 500 now trades at a price-to-earnings ratio of 27, and according to the CAPE ratio, the index is as expensive as it's been at any time in history except for the dot-com boom.

The Nasdaq is even pricier, with the Nasdaq-100 trading at a P/E of 34.

Despite the surging valuations in the broad market, there are still some stocks that are on sale. Keep reading to see two of the most attractive today.

Image source: Getty Images.

1. Netflix

Netflix (NASDAQ: NFLX) invented video streaming, and it has led the industry since it first offered internet video as an alternative to its DVD-by-mail business.

Its success in that industry has made it one of the top-performing stocks this century.

However, the stock has struggled over the last year, with shares falling 41% over the last year. Part of that decline was due to skepticism over its proposed buyout of Warner Bros. Discovery, as the stock briefly rebounded after the company backed out of the bidding war with Paramount Global for the HBO parent. However, Netflix has pulled back again, following a disappointing earnings report in April, as the chart below shows over the last year.

Netflix now trades at a price-to-earnings ratio of about 28, excluding the one-time $2.8 billion gain from the WBD termination fee, making it about even with the S&P 500, even though it's growing faster and has a set of well-established competitive advantages, including global scale, a pure-play streaming business, and pricing power.

The streaming stock posted a 16% increase in revenue in the first quarter to $12.3 billion and an operating margin of 32.3.%, making it much more profitable than competitors like Disney and WBD.

Netflix's guidance seemed to spook investors, however, as it forecast revenue growth to slow to 13.5%. Still, the fundamental strengths in the business haven't changed significantly.

The company continues to enjoy strong viewership and a growing advertising business, and it's expanding into new forms of content, including the World Baseball Classic.

In addition to the disappointing guidance, investors may be also be reacting to the failed bid for WBD, and a reported attempt to acquire Roku, which Fox recently acquired.

However, the sell-off seems overdone. The stock is now trading at an 18-month low, and at its lowest P/E ratio since 2022. It's worth picking up shares of this proven winner at the current price.

2. Microsoft

Microsoft (NASDAQ: MSFT) has fallen further than any other big tech stock over the last year as it's now down roughly a third from its peak last October.

Microsoft continues to put up strong numbers, but fears about disruption from AI-native programs like Anthropic's Claude have weighed on Microsoft and it software-as-a-service (SaaS) peers, and investors have been disappointed with its lack of progress in AI.

Nonetheless, the company continues to see booming growth from Azure, its cloud infrastructure business, and core software products like its Office suite, now called Microsoft 365, continue to grow as well.

Revenue in the third quarter rose 18%, or 15% on a currency-neutral basis to $82.9 billion, and adjusted earnings per share increased 18% to $4.27.

Despite fears about AI disruption, there is no sign that its software business is getting hurt by AI alternatives, and its productivity and business processes segment, which includes its software business, reported currency-neutral revenue growth of 13%.

Microsoft now trades at a P/E ratio of just 21, which is the cheapest it's been since before the pandemic.

In addition to the core cloud infrastructure and software businesses, Microsoft is also well-diversified across social media with Linkedin, gaming with Xbox and Activision, and with the Windows operating system.

At the current price, Microsoft looks like a steal if it can maintain its mid-teens growth.

Jeremy Bowman has positions in Netflix. The Motley Fool has positions in and recommends Microsoft and Netflix. The Motley Fool has a disclosure policy.