Despite the Nasdaq Composite hitting all-time highs earlier this week, not all stocks in the technology sector are performing as well. When stocks are missing out on the rally, value investors should get more interested in them, if only to kick the tires and see if the problems are even curable.
If the issues are fixable through management change or improvements in operations, then investors should consider those companies. If the headwinds are permanent and business is deteriorating, however, investors should avoid them like “WannaCry.”
Going on the aforementioned criteria, the following seven stocks to buy are criminally underrated, with the markets pricing them at such low forward price-earnings ratios they might as well be free.
What’s more, each tech stock in this list has returns lower than their corresponding sectors. I know, I know, it sounds ominous. But poor returns aren’t always indicative of negative fundamentals — investors may very well sell a stock after one bad quarter. If you’re in it for the long game, then a single quarter shouldn’t matter to you.
That said, here are seven tech stocks to buy that are underloved by the Street.
Tech Stocks to Buy: Snap (SNAP)
Forward P/E Ratio: N/A
YTD Performance: -15.3%
Since going public and topping $29.44 a share, Snap Inc (NYSE:SNAP) traded in the range of between $20 to $23. Then it reported first-quarter earnings. Revenues rose four-fold, but the $2 billion in stock-based compensation made up most of the losses in the period.
Facebook Inc (NASDAQ:FB) is also copying Snapchat’s features. Last month, it copied Stories, which allow for users to post videos and photos that disappear after 24 hours. But Snapchat’s loyal user base, which is mostly millennials, is unlikely to switch over to the FB app or to WhatsApp. Snapchat users enjoy having less of their personal data sold to advertisers.
Despite the plunge after-hours on May 10, Snap will take its time winning big-budget advertising deals. Already, Snap is reportedly adding self-service tools that help advertisers. It is also signing more deals that will add original content to the app. Management restraint in limiting how much stock it gives its employees would put an end to the losses.
Tech Stocks to Buy: Xerox (XRX)
Forward P/E Ratio: 8
YTD Performance: -18.5%
Xerox Corp (NYSE:XRX) trades at a criminally low P/E of -13 times and a forward P/E of 8.17 times. On April 25, the company reported first-quarter net income of $16 million on revenue of $2.45 billion. It expects earnings of 80 cents to 88 cents a share for the full year.
Most importantly, the company paid down $1.3 billion of its debt, lowering its long-term debt to $4.9 billion. Operating cash flow improved to $190 million, up from $103 million quarter-over-quarter.
Investors may speculate it is time for consolidation in the printing sector. Profit margins are thin and demand for printers is falling. Last quarter, equipment sales fell 7.4%. If HP Inc. (NYSE:HPQ) may buy out Xerox’s printing business, using its excess cash. In the meantime, Xerox is rolling out new products and is growing in the developing markets.
Helped by favorable currency exchange rates, Xerox should expect revenue getting a lift from both high-end color printing and entry production systems.
Tech Stocks to Buy: Seagate (STX)
Forward P/E Ratio: 9
YTD Performance: 15%
Conservative guidance from hard-disk maker Seagate Technology plc (NASDAQ:STX) ended the uptrend in the stock. While the company beat third-quarter estimates, it considered seasonal declines and component shortages when it issued its forward guidance. Seagate earned $1.10 a share on revenue of $2.67 billion. Gross margin of 30.5% from Q1 will follow with 31% in the current quarter. The company forecast earnings of $4.50 for the 2017 year.
The company’s Cloud Systems and Silicon Group reported growth of 19% Y/Y. It benefited especially from sales of Flash-based solutions. When asked how it would grow the company, CEO Luczo said:
“We continue to work the financial model so the Systems business is profitable to the overall business and then gives us the option to grow into some of these markets if we see either OEMs or CSPs decide that they want to see solutions at the systems level versus the device level. And we still believe that’s the opportunity in front of us.”
Demand for storage is strong. Cloud computing keeps growing and data centers will sustain demand for hard disk drives. Seagate’s plunge after the earnings report is overdone. The stock’s forward P/E is just 9.47 times and its dividend yields 5.9%. Profits from data storage solutions are not going away. NAS, DDR and consumer surveillance all need large-capacity hard drives. The steady business makes Seagate suitable for both value investors and income investors.
Tech Stocks to Buy: Ciena (CIEN)
Forward P/E Ratio: 12
YTD Performance: 7.3%
The optical networking sector is out of favor. Concerns over a drop in spending from telecoms in China are hurting Oclaro, Inc. (NASDAQ:OCLR) and Acacia Communications, Inc. (NASDAQ:ACIA). But Ciena Corporation (NYSE:CIEN) is holding up relatively well in the sector.
Still, at a forward P/E of 12, Ciena often comes back with a better quarter after reporting a poor one. In the first quarter, Ciena reported weakness in its Global Services unit, where revenue fell 18% sequentially. As often the case, Ciena will fix its misstep with that unit and may beat expectations when it reports results in June.
As Ciena works out ways in strengthening its operational efficiency, expect contract wins with Tier-1 companies and deals in India adding positively to the company’s prospects this year.
Tech Stocks to Buy: Acacia (ACIA)
Forward P/E Ratio: 15
YTD Performance: -27.7%
Similar to Ciena, Acacia is on a downtrend on worries over weakness in China, as some of Acacia’s biggest customers are in this region, including ZTE. Last quarter, the company reported earnings of 94 cents per share on revenue of $142.4 million. The company benefited from strong demand for its 100G and flex-400G products.
On May 9, Acacia reported first-quarter earnings of 77 cents per share on revenue of $114.7 million. It ended the quarter with $139.6 million in cash and cash equivalents. The company forecast second-quarter revenue of between $85 million to $95 million. The company’s light guidance sets out conservative expectations from investors. Factoring in potential delays in contract signings might explain why the CEO is not more bullish. If Acacia’s single largest company decides to boost capital spending, the stock will rebound. On its February conference call, the company said:
“We have seen a lower than anticipated order rate from one of our larger customers with exposure to the DCI market. This customer’s lower order rate is a major factor and how we formulated our first quarter guidance. We continue to see 2017 as a growth year for Acacia.”
Source: SA Transcript
Acacia’s growth will come from the DCI (optical data center interconnect) metro and the broadband infrastructure program in China. Though that outcome is far from certain, the company still must diversify its customer base. That would limit the company’s reliance on one customer.
Tech Stocks to Buy: Finisar Corporation (FNSR)
Forward P/E Ratio: 9
YTD Performance: -24%
Finisar Corporation (NASDAQ:FNSR) is an optical network hardware supplier. Its third-quarter earnings report in March started the bear phase in its stock. At a forward P/E of 9, Finisar is highly underrated. Sales for 100G and 3D sensing lagged, due to one customer. Once it works through its technical issues and adapts to the customer needs, the business will improve.
Finisar benefited from strong customer demand for 100G and ROADM line cards last quarter. This trend should continue. Sales of 100G QSFP are especially strong. This trend will continue as management expects it will sustain the current capacity, selling out the product this year.
The 3D sensing space should add positively to gross margins. For example, the VCSEL 3D sensing applications, Wavelength Selective Switch and QSFP28 all have high demand.
Tech Stocks to Buy: HP (HPQ)
Forward P/E Ratio: 11
YTD Performance: +26.8%
Despite closing at a yearly high, HP Inc (NYSE:HPQ) is still highly undervalued. Markets value the stock at at 11.35 times future earnings, but ignore the stabilization in PC shipments.
Shipments for PC grew by 0.6% — the first time PC shipments have grown in five years. HP led the market by shipping 13.1 million units in the first quarter. And markets do not realize the rebound in PC shipment may continue.
The smartphone market is saturated, while tablet demand is falling. Even Apple is facing falling demand for its iPads. The CPU chip refresh from Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) may drive upgrades from consumers and businesses.
With HP as one of the few suppliers of ready-made PCs, the stock has further upside ahead as the rebound in the PC market unfolds.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.