How does one find decent tech companies at reasonable valuations in a market like this one?
One option is to look for firms whose shares have been excessively punished due to short-term concerns or a spate of bad news (Juniper Networks (JNPR) and Cirrus Logic (CRUS) might be good examples here). Another is to look for companies trading at low multiples because currently-strong business conditions aren't expected to last, but for which there are reasons to think they can hold up better than many fear. A memory maker such as Micron Technology (MU) fits this description.
Another option still is to lengthen the amount of time one is willing to wait for a payoff: To look for beaten-down companies that could face major business challenges for a while longer -- and see their shares tread water because of it -- but for which there's a light at the end of the tunnel.
Here are a few companies that arguably fit this description.
Valuation: Nokia (NOK) has a $30 billion enterprise value (market cap plus net cash). Shares trade for 0.9 times trailing revenue of $29 billion, and 14 times trailing EPS of $0.41. They also carry a 4% dividend yield.
Why it's cheap: As 4G network buildouts have slowed and carriers in general have chosen to invest cautiously amid ongoing top-line pressures, both Nokia's mobile and wireline infrastructure sales have come under pressure. The company expects its core Networks division to see a 2% to 4% 2018 sales decline (on par with its "primary addressable market").
Reasons for hope: 5G network buildouts are set to start in earnest in 2019 and 2020, and Nokia looks set to claim a disproportionate share of carrier deals. According to a recent Raymond James analysis, Nokia has announced 50 carrier engagements to date, easily topping Ericsson's (ERIC) 38 and Huawei's 13. Nokia's large 5G R&D investments are likely helping its cause, as is the company's innovative ReefShark baseband chipset for 4G and 5G base stations and (thanks to the Alcatel-Lucent merger) an ability to offer end-to-end solutions that cover both mobile and wireless hardware/software.
News flow from this year's Mobile World Congress suggests quite a few carriers are eager to roll out 5G networks, in the hope that 5G's capacity, download speeds and IoT-friendliness will help unlock new revenue streams and/or grow existing ones. If this proves to be the case, Nokia's 2020 EPS consensus of $0.47 -- it assumes minimal revenue growth between now and then -- could look conservative.
Valuation: Knowles (KN) , a top supplier of microphones for mobile phone phones and other electronics hardware, has a $1.4 billion enterprise value. Shares trade for 17 times trailing EPS of $0.88 and 14 times a 2019 EPS consensus of $1.03.
Why it's cheap: Knowles is a major Apple (AAPL) supplier, and -- as its Q4 sales miss and light Q1 guidance drive home -- hasn't been left unscathed by recent iPhone X sales pressures. Investors are also on edge about soft smartphone demand in general.
Reasons for hope: The number of microphones going into the average smartphone has been gradually growing, with many high-end phones now sporting several mics to better support voice commands and noise-cancelation. And perhaps more importantly, shipments of headsets and home IoT devices (including, but not limited to, smart speakers) with built-in mics have been taking off. Knowles' IoT/headset microphone sales doubled in 2017.
In addition, Knowles' Precision Devices business (13% of Q4 revenue), which sells capacitors and other parts for a variety of markets, saw revenue rise 25% last quarter. Once the company's smartphone-related sales stabilize (the rumored fall-2017 launch of a 6.5-inch iPhone X and a cheaper iPhone supporting Face ID could help), it'll be harder to ignore its growth opportunities elsewhere.
Valuation: Inphi (IPHI) , which supplies analog chips, digital signal processors (DSPs) and transceiver modules for telecom and data center clients, carries a $1.3 billion enterprise value. Shares trade for 20 times trailing EPS of $1.52, and 15 times a 2020 EPS consensus of $2.19.
Why it's cheap: Depressed Chinese telecom capex, and the component inventory correction it spawned, has weighed heavily on Inphi over the past several months. In addition, the company disclosed on its Q4 earnings call that a lead customer for its ColorZ transceivers won't move forward with a planned product. This, together with Chinese pressures, resulted in very weak Q1 guidance.
Reasons for hope: There are some early signs that Chinese telecom capex is starting to improve, and in time, China's ambitious fiber-to-the-home (FTTH) and 5G plans should drive a rebound. Inphi is also forecasting second-half DSP ramps within both the telecom and cloud data center markets, and still expects growing sales of ColorZ, which uses silicon photonics tech to offer superior integration relative to rival transceivers, to cloud clients, with the 2019 launch of 400-gig transceivers providing a boost.
Between the strength of Inphi's product line and the speed at which cloud capex is growing, Inphi should return to seeing healthy growth in 2019, and maybe sooner. There's also a chance the company or peer MACOM (MTSI) , which also trades at reasonable multiples due to recent earnings woes, could be targeted as chip industry consolidation continues.