It’s been a tough year for almost all sectors of the market, but this bear has been particularly brutal for tech stocks, which have suffered big losses on concerns about rising interest rates. The Nasdaq Composite just hit a fresh two-year low following news that the Biden administration will require U.S. firms selling advanced semiconductors and related manufacturing equipment to China to apply for a license. Year to date, the index is down 32.6%. The silver lining is there are many cheap tech stocks on sale. Furthermore, there are signs that a rebound could come sooner than some anticipate.
While the Federal Reserve has remained resolute that it will continue to hike interest rates to get inflation under control, there are signs previous rate hikes are starting to have the desired effect. The market is eagerly awaiting another Consumer Price Index reading this week. If future data supports cooling inflation, the Fed may slow the pace of its rate increases, providing the market with a boost.
When this happens, whether it’s next month or next year, hard-hit tech stocks are likely to lead the way higher. Therefore, investors should consider the cheap tech stocks on today’s list as buy-and-hold candidates in anticipation of an eventual tech breakout.
|IBM||International Business Machines||$117.78|
Cheap Tech Stocks: Broadcom (AVGO)
Chipmaker Broadcom (NASDAQ:AVGO) fell nearly 5% today, bringing its year-to-date loss to 34%. On the bright side, shares look cheap, with a P/E ratio of 18.93, near the stock’s three-year low and significantly lower than the 30.95 median P/E ratio over the past 10 years. That means investors can purchase approximately 50% more earnings relative to price right now.
For 2023, analysts expect Broadcom to grow earnings by nearly 34% to $37.42 per share on a 21% revenue increase to $33.2 billion.
Where AVGO really stands out among its peers, though, is its return on invested capital to the weighted average cost of capital, or the ROIC versus WACC comparison. It costs the company 8.39% to borrow capital and the return on invested capital is 18.91%. That’s value creation in simple terms. In other words, Broadcom is a company that turns capital into more capital.
The upper-echelon tech companies have not been spared by the bear, and that includes Alphabet (NASDAQ:GOOG,GOOGL), which is down 32% year to date. The company saw revenue growth slow in the first quarter. This was followed by another slowdown in Q2, as the company reported lower-than-expected sales and earnings. Investors weren’t pleased.
The company also had more employees yet generated lower net income in Q2. The number of Albabet’s employees increased from around 144,000 in the second quarter of 2021 to around 174,000 at the end of this year’s second quarter. Meanwhile, net income declined from $18.5 billion to $16 billion during the same period. So, it’s not surprising CEO Sundar Pichai recently became more vocal about potential layoffs and other cost-reduction efforts.
This is obviously bad news for employees, but it represents an opportunity for investors. Alphabet is getting leaner and meaner, which will drive greater efficiency in the coming quarters.
Cheap Tech Stocks: Micron Technology (MU)
Idaho-based chipmaker Micron Technology (NASDAQ:MU) makes memory and storage products. Shares are down 45% so far this year, more than the Nasdaq and the semiconductor sector. What landed MU a spot on today’s list of cheap tech stocks to buy, though, is that the gap between the stock’s P/E ratio and its forward P/E ratio implies the market expects great things from the firm.
Micron’s P/E ratio is currently 6.62. That makes MU stock among the cheapest 20% of semiconductor stocks. However, its forward P/E ratio is above 45. That makes it more expensive than roughly 93% of industry competitors. In other words, the market thinks investors will pay significantly more for $1 of Micron’s earnings in the future.
This is likely due in part to the fact that the company is spending heavily to satisfy the push to boost domestic chip production. The company recently announced it will spend up to $100 billion to build a semiconductor manufacturing campus in upstate New York. It will take some time for the plan to be fruitful, but it should translate into higher prices for MU shareholders long term.
Applied Materials (AMAT)
Applied Materials (NASDAQ:AMAT) is a cheap tech stock with traditional value stock characteristics. AMAT stock carries an average target price of $123.44 but trades for around $79 following a 50% year-to-date drop. That target implies upside of more than 55%.
In November 2021, Applied Materials started paying a dividend, something more commonly associated with mature, value stocks than semiconductor firms. Shares currently yield 1.3%. While this yield isn’t likely to wow hardcore income investors, it is a positive in an industry known for growth reinvestment rather than dividend payouts.
Another reason investors should consider AMAT stock is that the company managed to increase EPS even as operating costs and margins increased. In its most recently reported quarter, net income fell 6% year over year. However, non-GAAP adjusted diluted EPS increased by 2% during the same period. In other words, Applied Materials is finding efficiencies for investors despite rising external cost pressures.
Cheap Tech Stocks: International Business Machines (IBM)
International Business Machines’ (NYSE:IBM) bullish narrative is similar to that of Applied Materials. Both are cheap tech stocks with value characteristics, including a dividend payment. In the case of IBM, shares yield 5.4% following an 8.6% year-to-date decline in the stock. That’s an impressive yield even by non-tech standards.
IBM’s Q2 earnings were impressive in many respects. Revenue and profits bested Wall Street’s expectations. However, given its large international base, IBM is particularly susceptible to the strong U.S. dollar. The revenue earned in those locations must be exchanged for U.S. dollars prior to being repatriated and accounted for. This is a drag on the company’s financials.
There’s little indication the dollar will weaken soon. But when it does, IBM’s results will get an immediate boost. In the meantime, shareholders have the dividend to tide them over.
Shares of Australian software company Atlassian (NASDAQ:TEAM) have lost 42% year to date. I think the selling is overdone based on the company’s strong fundamentals.
In its most recently reported quarter, revenue increased 36% year over year to $759.8 million. As investors are all too aware recently, growth alone can’t substantiate increasing share prices in the current macro environment. The bottom line has become much more relevant than the top line. Yet, there too, Atlassian showed drastic improvement, cutting its net loss by more than half to $105.5 million.
Analysts’ average target price is $320.45, implying upside of more than 45% from the current level. Investors who believe Atlassian’s assertion that its products are mission-critical to IT firms while also being relatively small-line items on their budgets, get it. Atlassian is doing a lot of things correctly and quickly improving fundamentals.
Cheap Tech Stocks: Alteryx (AYX)
Analytics automation firm Alteryx (NASDAQ:AYX) is down 24% year to date, yet the growth-oriented firm has a number of tailwinds. According to the company, analytics spending is expected to outpace other tech spending over the next 12-18 months.
In Q2, revenue increased by 50% year over year, reaching $180.6 million. Furthermore, annual recurring revenue was up 33% from a year ago to $727 million.
Annual recurring revenue, or ARR, is particularly important to tech firms because it represents subscription-based revenues. Those subscriptions often come from large enterprises, which contribute in an outsized manner to overall revenue. ARR is also used as a generalized indicator of overall health and in strategic planning.
AYX stock has 47% upside based on analysts’ average target price of $76.47. However, the high analyst price of $127 implies upside of 147%.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.