11 Newly Cheap Tech Stocks
Investors see the number of undervalued technology names almost double in a month, including Salesforce, Sabre.
For technology stock investors the market maybe coming back their way -- again. The number of undervalued companies rose to 48 from 26 in just over a month, totaling almost 20% of all companies considered undervalued on Morningstar’s coverage list.
The Morningstar US Technology Index is down more than 10.1% from its all-time high on Dec. 27. As a result, the sector is now just 4% overvalued compared with 18% at the end of last year.
Morningstar assesses a stock’s current valuation through the Morningstar Rating, which is based off analyst fair value estimates. Stocks rated with 5 or 4 stars are trading at a discount to their fair value and are undervalued. Below, you can see how technology stocks’ valuations have changed during the last few quarters.
To highlight the most attractive, newly undervalued tech stocks, we screened for changes in their Morningstar star rating between Jan. 21 and Feb. 7. We also added an economic moat filter to screen for companies with long-term competitive advantages. A list of all the stocks from our results can be found at the end of this article. Below, we’re highlighting four undervalued wide-moat stocks.
Salesforce was one of the pioneers of the SaaS business model, outpacing competitors when it revolutionized customer relationship management software. The company is one of the best long-term growth stories in software, according to Morningstar analyst Dan Romanoff, and has grown from a startup to servicing 33% of the customer relationship management market in the last 20 years.
“While revenue growth is likely to dip below 20% for the first time at some point in the next several years, we believe ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer,” Romanoff says. The company continues to grow its product lines, with recent acquisitions for Slack and Tableau adding to its portfolio.
“The tight integration among the solutions and the natural fit they have with one another make Salesforce a powerful value proposition,” Romanoff says. Salesforce is down 14.6% this year and trades at a 32% discount to its fair value estimate.
Taiwan Semiconductor is the world’s largest chip manufacturer, with companies like Apple (AAPL), Advanced Micro Devices (AMD), and Nvidia (NVDA) among their clients. Analyst Phelix Lee recently raised the company’s fair value estimate to $179 per share, leaving it at a 32% discount. “These changes mainly stem from a stronger pipeline of high-performance computing demand and increasing certainty from autonomous driving,” Lee says.
The company was recently contracted to produce new chips for MediaTek’s entry into the premium chipset market. Lee also sees two long-term growth catalysts for TSM.
“First, the recent consolidation of semiconductor firms is expected to create demand for integrated systems made with the most advanced manufacturing processes,’’ Lee says. "Second, organic growth of AI, Internet of Things, and high-performance computing, or HPC, applications may last for decades.”
Lee sees TSM as the leader in chip manufacturing technology. In January, the company announced a capital expenditure budget of $40 billion to $44 billion for 2022, up from $30 billion from last year. About 70% of the budget will be allocated to developing even more advanced manufacturing processes to maintain their technological lead over competitors.
Lam Research specializes in producing equipment used to manufacture semiconductors. Supply chain constraints cut into the company’s fourth-quarter profits, according to management. While sales were up 22% year-over-year, they were down 2% from the previous quarter. The company’s management and Morningstar tech strategist Abhinav Davuluri expect demand for equipment in 2022 to remain robust.
Expenditures on wafer fab equipment, Lam’s specialty, is expected to be around $100 billion this year, bolstered by Taiwan Semiconductor and Intel’s (INTC) large capital expenditure budgets for this year. “Although Lam has historically had greater exposure to memory end markets, such as NAND flash storage devices, we think it has improved its foundry and logic design wins in recent years sufficiently to achieve healthy growth in 2022 once it is able to overcome its supply chain headwinds,” says Davuluri.
Teradyne is a leading provider of automated testing equipment for semiconductors to other tech companies such as Apple and TSM. Teradyne also entered the industrial automation market in 2015, supplying autonomous robots for factories.
The company’s fourth-quarter earnings were down to $1.37 per share from $1.59 in the third quarter. Management also announced that sales would be down in 2022 due to a delay at TSM for it’s 3-nanometer node. As a result, investors have sent shares sliding 30.2% since the beginning of the year. Despite this, analyst William Kerwin still sees the company as highly attractive, trading at a 34% discount.
“We view this as a nearsighted market overreaction,” says Kerwin, on the stock’s recent decline. “Demand for testing is delayed, not destroyed. We expect all the lost sales to be recouped in 2023 and 2024.”
Jakir Hossain does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.