It may seem difficult to find cheap tech stocks because the Nasdaq hovers near the peaks all time. But if you take a closer look, you’ll notice that a lot of promising tech stocks are still trading at surprisingly low valuations in this sparkling market. Let’s take a closer look at three of these undervalued tech stocks: Cisco (NASDAQ: CSCO), Ericsson (NASDAQ: ERIC), and Skyworks Solutions (NASDAQ: SWKS).
Cisco is often viewed as a slow growing tech stock because it generates most of its revenue from network switches and routers. Both markets are highly commoditized, and Cisco’s revenue has grown at an anemic rate. TCCA 1.5% between fiscal years 2017 and 2021.
Cisco experienced a slowdown during the pandemic as its corporate and data center customers postponed their network upgrades. Its sales in China also fell sharply amid escalating trade tensions.
Image source: Getty Images.
But on its recent Investor Day, Cisco predicted its earnings and non-GAAP profits would both increase at an average CAGR of 5% to 7% between fiscal years 2021 and 2025.
This acceleration, announced in its strong fourth quarter report in August, will be driven by the growth of its higher margin subscription business and the expansion of its software ecosystem into newer markets such as hybrid work, security, optimized applications and automation. As the world’s largest manufacturer of networking hardware, Cisco offers many ways to bundle and cross-sell these services.
Cisco shares are trading at just 16 times forward earnings, and they are paying a 2.6% forward dividend yield. Its low valuation, high yield and optimistic outlook for the next four years make it a rock solid investment.
Ericsson is tied with Nokia (NYSE: NOK) as the world’s second-largest manufacturer of telecommunications equipment after Huawei, according to the Dell’Oro group. Ericsson and Nokia each had a 15% market share last year, while Huawei controlled 31%.
Ericsson and Nokia have both benefited from US sanctions against Huawei, which have forced many governments and corporate customers to replace the Chinese tech giant’s telecommunications equipment with non-Chinese products. The two European companies have also benefited from 5G upgrades around the world.
But Ericsson is arguably a better buy than Nokia, for three simple reasons. First, Ericsson’s 5G expansion went well as Nokia got bogged down in its costly acquisition of Alcatel-Lucent. Second, Nokia’s longtime CEO resigned last year after struggling to grow the company’s 5G business. The current CEO of Ericsson has been in charge since early 2017.
Finally, Nokia suspended its dividend last year in order to conserve more cash for its turnaround. Ericsson paid a good half-yearly dividend yield of 2% last year, and it will likely increase that payout again this year.
Ericsson has concluded 144 5G trade deals around the world, and analysts expect its revenue and profits to grow 9% and 11% respectively this year. Its shares are trading at just 14 times forward earnings, making it a fairly cheap way to profit from the expansion. 5G market.
3. Skyworks solutions
Skyworks manufactures wireless and radio frequency chips for a wide variety of markets. Apple, its first customer, represented 56% of its turnover in fiscal year 2020, which ended last October.
Skyworks revenue and profits fell 1% and 2%, respectively, in fiscal 2020 as the pandemic disrupted the mobile, automotive and industrial markets. The trade war also prevented it from shipping new chips to Huawei, a top customer that previously generated 10% of its revenue in 2017.
But this year, analysts expect Skyworks revenue and profits to grow 52% and 70%, respectively, as Apple and other smartphone makers sell more 5G devices and industries automobile and industry affected by the pandemic are recovering. It will also benefit from its recent purchase of Silicon laboratoriesinfrastructure and automotive unit, which will reduce its dependence on Apple and strengthen its portfolio of non-mobile chips.
Over the next few years, Skyworks expects the expansion of the Internet of Things (IoT), the connected vehicles and smart home markets to further diversify its activity away from smartphones. He expects each new generation of these smart devices to require more of his wireless chips.
Skyworks trades at 16 times forward earnings and pays a 1.3% forward dividend yield. This low valuation should limit its downside potential as it benefits from Apple’s growth and penetrates new markets.
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Lion sun owns shares of Apple and Cisco Systems. The Motley Fool owns shares and recommends Apple. The Motley Fool recommends Silicon Laboratories and Skyworks Solutions and recommends the following options: March 2023 long calls at $ 120 on Apple and March 2023 short calls at $ 130 on Apple. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.