• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Technology

3 Places for Value-Hunting Tech Investors to Potentially Look

There are still quality, reasonably-priced, tech companies out there, albeit with some risks attached.
By ERIC JHONSA
Aug 22, 2020 | 08:00 AM EDT
Stocks quotes in this article: AMAT, KLAC, LRCX, ICHR, UCTT, DOMO, NTNX, SWI, DBX, BZUN, BABA

Needless to say, tech investors often have to pay pretty rich multiples right now to own a piece of favored tech giants and high-growth software and Internet names.

But if one looks off the beaten path -- which is to say, away from the companies and industries that growth and momentum investors have crowded into over the last few months -- one can still arguably find some decent companies sporting reasonable valuations.

There are three caveats here:

  1. Cheap stocks are often cheap for a reason. While there's a good case in an environment like this one for combing the bargain bin for values as opposed to paying top dollar for showroom items, one still needs to be selective while doing so.
  2. Given how correlated tech stock movements often are, a major selloff in more richly-valued names probably won't leave cheaper stocks unscathed, though they might register smaller declines.
  3. Investors should definitely do their own research before buying any of the names that are mentioned below.

With that out of the way, here are three areas where one can find growing companies whose multiples haven't skyrocketed.

1. Chip Equipment Makers

Valuations - With a few exceptions, chip equipment stocks haven't registered massive gains this year, after having bounced sharply from their late-2018 lows in 2019. Names such as Applied Materials (AMAT) , KLA  (KLAC) and Lam Research (LRCX) still carry forward P/Es (based on their next fiscal years) in the teens, and Ichor  (ICHR) and Ultra Clean Holdings (UCTT)  are even cheaper.

The Bull Case - Global chip consumption continues to steadily grow, and there's a long-term trend towards greater capital-intensity for cutting-edge logic and memory manufacturing processes. Taiwan Semiconductor is still investing heavily in capex, and memory makers are starting to dial up their capex after cutting it sharply last year. Also, orders from Chinese chip manufacturers have been rising sharply.

Risks - Memory demand and prices have been softening a bit lately, and that just might affect the capex plans of some memory makers. Also, in light of both the extensive sanctions placed on Huawei and new restrictions on tech exports to China that could have military uses, there's a risk that some of the chip equipment exports to China that are currently allowed could eventually be blocked.

2. Software Vendors Likely to See Moderate Growth

Valuations - There's a middle ground to be found between high-growth SaaS firms that have been bid up to nosebleed valuations (e.g. Zoom, Coupa Software, Okta, etc.) and age-old, share-losing software vendors with understandably low P/Es (Oracle, IBM, etc.). Cloud business intelligence software vendor Domo (DOMO) has a forward EV/sales ratio of around 5, while hyperconverged infrastructure software vendor Nutanix (NTNX) has one around 3. IT management software vendor SolarWinds (SWI) has a forward EV/FCF ratio of around 18, while Dropbox (DBX)  has one of just 15.

The Bull Case - Specific growth drivers vary from company to company, although software's steady growth as a percentage of global IT spend is more broadly a tailwind. Domo benefits from growing corporate BI/analytics investments, while Nutanix benefits from rising adoption of hyperconverged infrastructures on account of their scalability and ease of management. Dropbox continues seeing healthy demand among individuals and SMBs for its cloud storage and collaboration offerings.

Risks - Businesses seeing top-line pressures thanks to COVID-19 are often paring back their IT spend, and that's particularly a headwind right now for tech companies that get much of their revenue from on-premise enterprise (as opposed to cloud) deployments, such as SolarWinds and Nutanix. Also, all of the aforementioned companies face competition from larger tech companies.

3. Chinese Tech Stocks

Valuations - Though some Chinese tech stocks have registered big gains this year, their valuations are still often meaningfully lower than those of American peers with comparable growth profiles. Fast-growing e-commerce software/services provider Baozun  (BZUN) has a forward P/E of 22, and Tencent-controlled game-streaming leader Huya HUYA has a forward EV/sales ratio of 2. And though (like Amazon) it's clearly not being run with the goal of maximizing short-term profits, Alibaba (BABA) still only has a forward P/E of 23.

The Bull Case - China's economy has been rebounding well after slumping earlier this year thanks to COVID. Long-term, continued middle class/disposable income growth and well-evolved Internet and mobile ecosystems should remain tailwinds.

Risks - Trade and geopolitical tensions are clear wild cards here, as is the possibility that new accounting rules could lead many Chinese companies to be delisted from U.S. exchanges. Also, accounting concerns are still very much around in the wake of the Luckin Coffee scandal.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.
TAGS: Investing | Technology

More from Technology

2021 and 2022 Look Difficult for Intel, While 2023 -- Might -- Be Better

Eric Jhonsa
Jan 22, 2021 1:44 PM EST

Competition from AMD and ARM CPU developers looks set to take a toll over the next two years. But Intel could be in better shape in 2023 if its new CEO is ready to make some tough choices.

Intel Disappoints and Its Stock Suffers

Bruce Kamich
Jan 22, 2021 11:45 AM EST

When the chipmaker turns lower you need to get out the way.

Taser Maker Axon Enterprise Is Poised for New Highs

Bruce Kamich
Jan 22, 2021 8:10 AM EST

AAXN has rallied about $50 this month.

Palantir Technologies Looks Toppy and Further Declines Are Possible

Bruce Kamich
Jan 21, 2021 11:06 AM EST

Stand aside from the long side.

Tech Gives Push to Market's Rotation

James "Rev Shark" DePorre
Jan 20, 2021 4:49 PM EST

Money moved back into big-cap technology names, thanks to strong positive reactions to earnings from Netflix.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:01 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    I discuss price targets in my Saturday column.
  • 07:54 AM EST GARY BERMAN

    Friday Morning Fibocall for 1/22/2021

    SPX (Long-Term View) The 1/21/21 NEW high @ 3861...
  • 11:16 AM EST CHRIS VERSACE

    Worst Stocks to Buy for the Biden Presidency

    Biden's take on the minimum wage, likely moves on ...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login