The tech sector has really been the place to be in the recent past of the market. Over the past decade, a wave of technological disruption has dramatically changed our entire lives, powered by smartphones, cloud computing and powerful internet platforms. No surprise, the tech-heavy ETF Invesco QQQ Trust (NASDAQ: QQQ) the broader market fared much better than:
QQQ 1 year total returns (daily) data by YCharts
Despite the tremendous rise in technology, there are still great values in the sector. Here are three great tech companies that belong on your shopping list.
Image Source: Getty Images.
Alphabet
Google search older Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) rose higher after its earnings report in the fourth quarter last week. But do you know what? I think the stock is still undervalued.
Certainly, the stronger revenue than 23% of Alphabet and the extreme performance than expected was nice to see when the company recovered from COVID-19 wind. But the real story was the very first announcement of Google’s profitability in cloud units.
In the end, Google Cloud picks up pretty big losses – much more than I expected:
|
Google Cloud Unit Statistics |
2018 |
2019 |
2020 |
|---|---|---|---|
|
Income |
$ 5.8 billion |
$ 8.9 billion |
$ 13.1 billion |
|
Operating profit (loss) |
($ 4.3 billion) |
($ 4.6 billion) |
($ 5.6 billion) |
Data source: Alphabet investor relations. Graph by author.
Why then did the Alphabet’s shares rise higher when the cloud unit burned more cash than expected? Because it means that the “core businesses” – Search, YouTube, Play Store and hardware – are much more profitable than investors thought. These businesses earned a total of $ 54.6 billion in operating revenue last year, up 11.4% from 2019. But remember, the COVID-19 pandemic seriously affected results in the first two quarters of the year. For the fourth quarter, businesses grew by 41% operating income in the fourth quarter of 2019.
Investors have likely increased Alphabet’s shares to earnings because they value the core businesses of their earnings, yet value the cloud business of sales. As the core business is more profitable, investors can value it higher, while the value to the cloud industry probably has not changed that much. After all, many high-growth cloud software stocks also incur large losses, but investors have nevertheless brought them to a high valuation due to the strong revenue growth.
Alphabet’s $ 1.39 billion valuation is just 25.4 times the core business revenue for Google services for 2020, which would actually be a good valuation based on the business alone. Yes, the cloud lost $ 5.6 billion and Alphabet’s lunar segment “other bets”, including Waymo and Verily, burned another $ 4.5 billion. Yet both of these segments are likely to have a significant positive value.
Considering that you get these huge loss-making businesses basically for free, and Alphabet still looks like a good value, even after earnings after earnings.
T-Mobile
T-Mobile (NASDAQ: TMUS) reported strong results in the fourth quarter last week, but the stock slipped slightly in the aftermath. Why? Potentially, investors may be impressed by the company’s leadership for 2021 after a sample 2020 that boosted T-Mobile’s share by 72%.
TMUS data by YCharts
T-Mobile’s guidance for 4 million to 4.7 million net additions in the coming year will still be fairly strong. The net addition of 5.6 million in 2020 was, after all, the strongest in company history and the best in the industry. Furthermore, T-Mobile has a history of conservative and convenient beating of expectations.
Meanwhile, the noise surrounding the full lead of the year is just a distraction from the fact that T-Mobile has a 5G network vis-à-vis competitors. Last quarter, T-Mobile exceeded its target of covering 100 million people with a high-band 5G spectrum, and 280 million covered by slower low-band 5G.
This is a huge advantage over its competitors, and it should be a distinction as consumers are upgrading to 5G phones this year. Combined with billions of upcoming synergies due to the Sprint acquisition in 2020, and T-Mobile will have to grow and expand margins, not only in 2021, but also over the next few years. Any withdrawal could be an opportunity for long-term investors.
Super Micro Computer
Another undervalued technology company that just reported its earnings Super Micro Computer (NASDAQ: SMCI). Super Micro tailors servers for large data center customers, and the business was interrupted by COVID-19, both from a demand and supply perspective. Last quarter, Super Micro’s revenue fell 5% year-on-year, but 9% quarter-on-quarter, showing a recovery from the slowdown earlier in the year.
However, Super Micro is on the verge of increasing sales beyond its original customer base. The company has just completed a build-up of its campus in Taiwan, which will enable it to produce high volumes of cloud servers at lower cost, which will open up the large cloud computing market. In addition, Super Micro is starting to make servers for the 5G / telco market, which gained new customers last year and increased higher volumes in 2021.
Super Micro has seen its stagnant momentum stagnate over the past few years because it had to deal with an accounting scandal, but the company cleared its books and listed them on Nasdaq again a year ago. CEO Charles Liang is confident the company can grow again and has promised an upcoming analyst day where Super Micro will set out its $ 10 billion revenue target. For context, it is more than triple that Super Micro is earning revenue today.
Despite the rosy growth prospects, Super Micro is trading just ten times more than its 2021 revenue estimate. It seems far too cheap for a stock with the potential to triple its sales in the future. In addition, Super Micro has net cash of $ 270 million and has only approved a $ 200 million repurchase program, allowing management to benefit from the sale of the share.