No need to mince words — the past few weeks have been rough ones for tech stocks. The S&P 500 Technology Sector Index has fallen more than 14% since early October, reaching a new multimonth low on Friday.
And that was just the average. Some stocks, including a couple of high-profile FANG stocks, have suffered even bigger losses.
The irony? The third quarter was a record-breaking one for the technology sector’s stocks. The S&P 500 Technology Sector Index earned $16.98 per share last quarter, up 39% year-over-year. In fact, a long hot streak of earnings growth in front of the recent pullback from these names has left the index at a trailing P/E of 17.9 and a forward-looking P/E of 16. That’s as cheap as these stocks have been since 2016, and the bottom lines are expected to keep going up through the end of next year.
Translation: This beatdown is an opportunity to step into long-term positions in high-quality tech stocks.
To that end, here’s a rundown of the top 10 beaten down tech stocks to buy in this undervalued sector. In no particular order…
Alphabet (GOOG, GOOGL)
The search engine business isn’t what it used to be. Though web traffic has never been heavier, the prices per “click” continue to slide lower as they become more and more of a commodity. Last quarter, the value of a click fell 28% year-over-year. The company makes up for it in sheer volume, however, with the total number of clicks up 62% a quarter ago.
The math works. The proof is in the long-term trend. Only once in the past 12 years has the company failed to report quarterly revenue growth. That streak isn’t apt to end anytime soon either, making the 20% pullback from GOOGL since July a buying opportunity.
It’s not exactly a financial stock, but it doesn’t exactly look like it belongs among tech stocks either. Rather, Square (NYSE:SQ) fits nicely into a small sliver of the market known as fintech (financial technologies), and may well be among the top stocks to buy within that group.
You know the company, even if you don’t know you know the company. Square is the maker of the little square-shaped scanner that attaches to a smartphone, turning into a credit card acceptance machine. Small businesses love it, driving revenue growth of 60% this year and a projected sales growth rate of 43% next year.
It’s not the fact that it addresses an underserved market that makes SQ stock so compelling though. The catalyst to keep an eye on is its nascent lending/financing businesses … another market that has been largely ignored by everyone else.
Universal Display (OLED)
Universal Display (NASDAQ:OLED) primarily makes OLED (organic light emitting diode) display screens and corresponding technologies.
Though OLED screens have been saddled by challenges like “burn in” and uncomfortably high prices, like any other technology, it will get better and cheaper with time.
In the meantime, Universal Display faces an even more finite problem. Sales of smartphones, which have been its core business thus far, are slowing. Namely, Apple (NASDAQ:AAPL) — which intends to use OLED screens on two new iPhones launching later this year — has reportedly scaled back previous orders of components. That and similar news has driven OLED stock down 35% since August.
This may well be a case, however, where sheer fear has unnecessarily done damage that will soon be undone. Revenue is projected to grow 47% next year.
Qorvo (NASDAQ:QRVO) isn’t exactly a household name, though it’s very likely nearly every household in North America benefits from at least one Qorvo-made product. From microcontrollers to RF components to WiFi technologies, this company supplies the simple but crucial parts of the technologies we all rely on every day.
Like Universal Display, Qorvo has been adversely impacted by the slowdown in smartphone sales and by Apple’s headwind in particular. Also like OLED stock. though, the bears may have ripped into QRVO stock a bit too aggressively.
The forward-looking P/E ratio now stands at 9.2, and analysts are still looking for sales growth and even faster earnings growth into next year.
Apple, on the other hand, as a name that needs no introduction at all. Not only is it the world’s biggest and most profitable company, it’s also the world’s best known brand.
Yes, smartphone sales are slowing down, and that has hurt Apple more than any other outfit; 59% of last quarter’s revenue was driven by iPhone sales. The slowdown is so alarming, in fact, that the company has decided to no longer share unit sales data. Most analysts have interpreted it as a sign that Apple knows the upcoming iPhone sales numbers could turn into liabilities. That’s a big part of the reason AAPL stock has fallen 24% from its early October peak.
What the market has largely forgotten, however, is that this is Apple. It always finds a way to sell something, and finds a way to deliver a high-quality product and make a buck by doing so.
ServiceNow (NYSE:NOW) is a machine no competitor wants to stand in front of. Revenue is on pace to improve 35% this year, driving earnings growth of 98%. Next year’s sales are modeled to improve 29%, pushing earnings up to the tune of 33%.
So why is NOW stock down 24% from its early September peak? Primarily fear, most of which is unmerited.
What’s largely gone underappreciated about ServiceNow is how much of the software-as-a-service company’s revenue is recurring revenue, meaning its customers have signed on for perpetual access and perpetual payments.
As of the most recent look, 93% of its business comes from customers who’ve already established themselves as repeat customers. That allow for a very steady, reliable stream of sales and income.
Cisco Systems (CSCO)
Networking giant Cisco Systems (NASDAQ:CSCO) used to be the king of its market, … and it still is. That kingship has been increasingly called into question though, as smaller players have figured out how to build a better proverbial mousetrap. Virtualized networks — as opposed to physical switches — have further leveled the playing field.
Rumors of Cisco’s death have been greatly exaggerated though. It too can successfully play the recurring revenue game, and has introduced its own virtualization options. As of the end of the fiscal year ending in July, nearly one-third of the company’s revenue was recurring, and services revenue accounted for about a fourth of its total business.
That’s not the only reason CSCO stock may be one of only a few tech stocks to buy sooner than later, however. Curiously, while most other names have been getting trashed, Cisco shares have held up. They’re only down a little more than 8% since early this month, and only off a little more than that since their early October peak. There’s a lot to be said about resilience.
MKS Instruments (MKSI)
MKS Instruments (NASDAQ:MKSI) makes and markets the tools and technologies used by other higher-profile tech names. Its wares include equipment that makes semiconductors, solar panels, pharmaceuticals and more. It’s one of the tech stocks consumers know next to nothing about, but technology companies know very, very well.
For the few investors who know MKS Instruments well enough to own a position in it, the past 10 months haven’t been fun ones. MKSI stock has fallen more than 40% since peaking in January, as investors have been forced to rethink just how strong the tech market really is.
As was pointed out above, though, the technology sector just logged its most profitable third quarter ever. And, MKS just did the same. The beat-down has pulled MKSI stock down to a trailing P/E of 10, which is far too cheap to ignore.
Yes, left-for-dead Advanced Micro Devices (NASDAQ:AMD) has simply embarrassed Intel (NASDAQ:INTC) this year, roaring back from irrelevancy to threaten Intel’s dominance of the computer processor world. Intel didn’t even appear to be aware its smaller rival was working on computer and server chips that would eat into its business. Perhaps worse, AMD is clearly going to win the race to commercialize 7 nanometer processors while Intel is still struggling to make a decent 10 nanometer CPU.
Enough is enough, however. Intel, despite all of its challenges, is still Intel, and when it really wants to it can work its way back into “beast mode.” Not too many companies with stocks trading at only 10.5 times their forward-looking earnings can boast that kind of claim.
In the meantime, just to juice its upside following the June-October pullback, Intel added another $15 billion worth of approved funding to its stock buyback program.
Applied Materials (AMAT)
Last but not least, add Applied Materials (NASDAQ:AMAT) to your list of tech stocks to buy here, in the shadow of its 48% pullback between March and October.
Akin to MKS Instruments and Qorvo, Applied Materials isn’t as much of a technology maker as it is a supporter of technology developers. The company offers a variety of solutions that help chipmakers, solar panel companies and display screen manufacturers fabricate high-quality components.
This year hasn’t been a great one for the company, with sales on pace to decline 9% for all of 2018. That’s the key driver of the stock’s setback. It appears business is turning around though. Analysts collectively think revenue will improve nearly 11% this year, driving a 24% recovery in per-share profits.
Just as encouraging is how the rest of the market believes in the turnaround. AMAT stock is up nearly 20% from last month’s low, though it still has plenty of room to continue recovering.
As of this writing, James Brumley held a long position in Alphabet. You can follow him on Twitter, at @jbrumley.