3 Top Tech Stocks With Compelling Valuations

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The pandemic-driven tech rally came to an abrupt halt owing to rising Treasury yields, which have been driving investors toward cheaper, turnaround candidates. However, given the tech industry’s growth potential, we think investing in undervalued industry giants Intel (INTC), Telefonaktiebolaget LM Ericsson (ERIC), and F5 Networks (FFIV) could be immensely rewarding.

Technology companies have seen robust demand for their products and services over the last year due to pandemic-driven trends. This has translated into their stock market performance, as is evidenced by iShares Global Tech ETF’s (IXN) 53.8% returns over the past year. However, the U.S.’ faster-than-expected economic recovery has motivated  investors to focus on cheaper turnaround stocks, triggering a tech sell-off earlier this year.

However, given the heightened demand for cybersecurity, cloud services and other tech products, this investor rotation is not expected to continue for long because tech players are racing to deliver the next generation of efficient and reliable products and solutions to their customers. The global information technology market is expected to grow at a 9% CAGR over the next five years to $11.87 trillion by 2025. Because the tech industry is expected to rebound soon, investing in value stocks with substantial growth potential should deliver healthy returns to investors in the foreseeable future.

We think, Intel Corporation, Telefonaktiebolaget LM Ericsson, and F5 Networks, Inc., which are  currently trading at discounted valuations versus their peers, are ideal investment bets now.

Intel Corporation

INTC designs, manufactures, and sells computer products and technologies. The company operates through six segments—Data Center Group, Internet of Things (IoT), Non-Volatile Memory Solutions Group, Programmable Solutions Group, Client Computing Group and All Other. It serves original equipment manufacturers, original design manufacturers, and cloud service providers.

On May 3, INTC announced a $3.50 billion investment in the Rio Rancho campus to equip its New Mexico operations to  manufacture advanced semiconductor packaging technologies, including its 3D packaging technology, Foveros. Construction is expected to start later this year. INTC’s investment on Rio Rancho is part of its  INTC’s IDM 2.0 manufacturing expansion plans.

INTC and Samsung Electronics Co. Ltd.   teamed up on April 28 to include INTC’s industry-best Intel Evo-verified designs, powered by 11th Gen Intel Core processors, in Samsung’s updated Galaxy Book and Galaxy Book Pro, the latest additions to its Galaxy Book lineup for 2021. Both companies hope to deliver advanced computing experiences across mobility, connectivity and performance.

For its  fiscal year 2021 first quarter, ended March 27, 2021, INTC’s non-GAAP operating margin was 32.8%, which represented a 130-basis-point rise sequentially. The company’s revenue from its IoT segment increased 13.5% year-over-year to $1.29 billion. And its revenue from its Client Computing Group increased 8.5% year-over-year to $10.61 billion.

INTC surpassed the Street’s EPS estimates in each of the trailing four quarters. Analysts expect the stock’s EPS to grow at 5.4% per annum over the next five years. INTC stock has climbed 26% over the past six months to close yesterday’s trading session at $57.19. Over the past nine months, the stock has gained 17.8%.

In terms of non-GAAP forward P/E, INTC is currently trading at 12.35x, which is 50.7% lower than the 25.06x  industry average. In terms of forward EV/EBITDA, INTC is currently trading at 7.49x, which is 54.6% lower than the 16.49x industry average.

INTC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an A grade for Value, and a B grade for Quality and Sentiment. In addition to the POWR Ratings grades we’ve just highlighted, one can see INTC’s ratings for Growth, Stability, and Sentiment here.

INTC is ranked #10 of 98 stocks in the B-rated Semiconductor & Wireless Chip industry.

Telefonaktiebolaget LM Ericsson 

ERIC is a Sweden-based company that provides telecommunication equipment and related services. The company operates through four segments—Networks, Digital Services, Managed Services, and Emerging Business and Other. It offers its products and services to mobile and fixed network operators, and  provides communications networks, telecom services, and multimedia solutions.

On May 4, ERIC entered a strategic partnership with Telarus, the largest privately held technology services distributor in the U.S., to market Ericsson Wireless Office through its large ecosystem of technology consultants. By providing a 5G-ready office solution with the IT infrastructure in the cloud, ERIC’s Ericsson Wireless Office hopes to target a $90 billion small- and medium-business (SMB) market in the U.S.

In April, AT&T (T) and Cradlepoint, which is part of the ERIC Group, expanded their joint network offerings to deliver the most comprehensive portfolio of 5G solutions in the U.S. With Cradlepoint’s 5G wideband adapters and routers and its NetCloud Service, and T’s Wireless Broadband network, the enterprise-tailored 5G solutions will give businesses the flexibility to choose the solution, speed, quality of service, and management structure that works for them.

For its fiscal year 2021 first quarter, ended March 31, ERIC’s net sales were SEK49.78 billion, which represented a significant improvement from the prior-year period. The company’s SEK21.30 billion gross profit represents a 7.6% improvement from the prior-year period. Its net income was SEK3.17 billion for the quarter, up 38.9% from the prior-year period. Also, its adjusted EPS increased 31.6% year-over-year to SEK1.04.

Analysts expect ERIC’s EPS to improve 40% year-over-year for the current quarter, ending June 30. The stock has surpassed consensus EPS estimates in three of the trailing four quarters. The $6.66 billion consensus revenue estimate for the current quarter represents a 19.6% rise on a year-over-year basis. Analysts expect the stock’s EPS to grow at 13.9% per annum over the next five years.

ERIC has gained 66.1% over the past year and closed yesterday’s trading session at $13.69. In terms of its non-GAAP forward P/E, ERIC’s 18.61x is 25.7% lower than the 25.06x industry average. In terms of forward EV/Sales, the stock is currently trading 62% lower than the industry average (1.56x versus 4.10x).

ERIC’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system.

The stock has a B grade for Value and Stability. We have also graded ERIC for Growth, Sentiment, Quality and Momentum. Click here to access all ERIC’s ratings.

ERIC is ranked #5 of 54 stocks in the B-rated Technology – Communication/Networking industry.

F5 Networks, Inc. 

FFIV provides multi-cloud application services for the security, performance, and availability of network applications, servers, and storage systems. The company also offers a range of professional services, including consulting, installation, maintenance, and other technical support services. It sells its products to large enterprise businesses, public sector institutions, governments, and service providers through distributors, value-added resellers, managed service providers, and systems integrators.

On April 20, at its industry-leading Agility event focused on improving application security and performance, FFIV announced enhancements to its application security portfolio that highlight its progressive approach to application security, enabling customers to deliver safe, frictionless, and modern digital experiences. Amid this heightened demand for cybersecurity, the company hopes to strengthen application security and protect various core businesses and consumers.

FFIV collaborated with NVIDIA Corporation (NVDA) on April 12 to include NVIDIA BlueField-3 DPU and the NVIDIA Morpheus AI framework for cybersecurity, to deliver solutions that enable businesses to benefit from the offload and acceleration of application security and delivery services at scale.

For its fiscal year 2021 second quarter, ended March 31, FFIV’s non-GAAP net revenues were $645.29 million, which represented a 10.2% improvement from the prior-year period. The company’s gross profit came in at $516.70 million, which represents a 7.2% improvement from the year-ago period. Its non-GAAP net income was $155.15 million for the quarter, which represented 14.1% improvement year-over-year. Also, its non-GAAP EPS increased 12.1% year-over-year to $2.50.

Analysts expect FFIV’s EPS for the next quarter, ending September 30,  to be $2.71, up 11.5% year-over-year. It surpassed the Street’s EPS estimates in each of the trailing four quarters. For the next quarter, analysts expect FFIV’s revenue to be $662.08 million, representing a 19.6% rise from the prior-year period. The stock’s EPS is expected to grow at 11.8% per annum over the next five years.

FFIV has gained 28.4% over the past nine months and 26.1% over the past six months. It closed yesterday’s trading session at $182.09. In terms of non-GAAP forward P/E, FFIV is currently trading at 17.75x, which is 29.2% lower than the 25.06x industry average. And in terms of its forward EV/EBIT, the stock is currently trading at 13.65x, 33.9% lower than the 20.66x industry average.

It’s no surprise that FFIV has an overall B rating, which equates to Buy in our POWR Ratings system.

FFIV has an A grade for Quality, and a B grade for value. In addition to the POWR Ratings grades we’ve just highlighted, one can see FFIV’s ratings for Growth, Stability, Sentiment and Momentum here.

In the Software – Business industry, FFIV is ranked #7 of 59 stocks.

INTC shares were trading at $57.65 per share on Friday afternoon, up $0.46 (+0.80%). Year-to-date, INTC has gained 17.83%, versus a 13.39% rise in the benchmark S&P 500 index during the same period.

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