These are six of the most undervalued stocks to buy in the technology, media, and telecom (TMT) fields. Some have recently taken a dip as a result of lower guidance related to the economy and shipping-related delays and cost increases.
These TMT stocks all have good earnings prospects, and, indeed, several of them are producing huge amounts of free cash flow (FCF). That FCF allows these stocks to pay dividends and/or buy back large amounts of shares. This has the effect of increasing dividends and earnings per share (EPS), lowering the valuation, and making the stock more attractive. The constant buying also helps push up their stock prices.
Typically TMT companies make good margins and are unusually profitable. That allows them to pay out dividends to their shareholders. This is another popular way to return capital to shareholders.
Let’s dive in and look at these stocks.
|WBD||Warner Bros Discovery||$16.92|
Warner Bros Discovery (WBD)
Market Cap: $41 billion
Warner Bros Discovery (NASDAQ:WBD), was the result of a spin-off of Warner Media from AT&T (NYSE:T) and Discovery Inc. It is down from $25 when it spun off a month or so ago to $16.92. In effect, it combines HBO and the Warner Bros movie studio with the reality show champion Discovery (think “Naked and Afraid“).
Analysts now forecast that the company will make $1.70 in 2023, its first full year of earnings. So, that puts WBD stock on a forward price-to-earnings (P/E) multiple of 10.3x. Moreover, its sales are forecast to hit $51.4 billion by 2023. That puts its price-to-sales (P/S) multiple below 1x (0.83).
At 12x earnings and/or 1x sales, a reasonable valuation for the stock, WBD could rise from 14% to 20% from here. In other words, even with a recession, this media stock could rise because it’s so undervalued. That makes it one of the top undervalued stocks to buy.
Market Cap: $468 billion
Nvidia (NASDAQ:NVDA) stock is a bargain after its recent earnings release on May 25. It produced record revenue, up 46% YOY, but earnings were down 16% on a GAAP basis. However, non-GAAP earnings were up 49% YOY. This excludes one-time charges relating to the terminated ARM acquisition in the UK.
The bottom line is that the stock now trades for 30x 2023 forecast earnings. That seems like a bargain, as I wrote recently, for a stock that normally trades on average for 40 times earnings over the last 5 years, according to Morningstar.
Nvidia pays a small dividend but it could easily afford to do more. So far it returns capital to shareholders through large share buybacks. Last quarter alone it repurchased almost $2 billion of shares ($1.996 billion). That represents about 1.7% of its market cap on an annual basis ($8b/$467b), which will help push NVDA stock higher.
Market Cap: $150.23 billion
AT&T (NYSE:T) is a clean wireless telecom company now that it spun off its Warner Media division, which housed HBO and the Warner Bros studio. Analysts now project that in 2023, it will produce sales of $122.6 billion. That puts it at just 1.25x times sales.
Moreover, with 2023 projected EPS of $2.52, AT&T stock at $20.98 on June 6 is trading for just 7.63x times earnings. Given that AT&T pays a $1.11 dividend, the stock now has a very attractive yield of 5.31%. These two factors make the stock very attractive.
AT&T is using its cash flow to pay down debt and get its core margins and business under control. That will help push the stock to its intrinsic value. For example, at 12 times earnings, AT&T stock could move 57.2% higher (i.e., 12x/7.63x-1).
Market Cap: $214.5 billion
Verizon (NYSE:VZ) looks like a good bargain here. In short, the wireless communications stock has a 5% dividend yield and trades on a forward P/E multiple of just 9.1 times (i.e., $50.81 / $5.58 EPS).
Moreover, the company can afford to pay its healthy $2.56 dividend. That represents just over half of its earnings forecast for 2023 (45.8%). It also gives VZ stock a very attractive dividend yield of 5.04%.
The company has huge capital expenditures, but as of Q1 it still produced $1 billion in free cash flow (FCF). Going forward, this could get squeezed if revenues don’t rise by $3 billion as analysts project in 2023. But if they do, this could be one of the best defensive stocks, especially if the company decides to maintain its dividend.
Market Cap: $1,54 trillion
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) reported 23% higher revenue in Q1 from a year ago. However this was slower than the 34% growth rate last year, so the market was concerned about a slowdown in ad revenue growth.
This has provided a good dip-buying opportunity for long-term investors. For example, analysts now project 18.8% higher EPS growth at $111.43 in 2023 over 2022. At $2,346.70 per share on June 6, this puts GOOG stock on a cheap forward P/E multiple of just 17.2 ties for 2023.
That is substantially below the company’s historical forward P/E multiple of 26.5 x over the past five years. That puts its intrinsic value 54% higher (compared to its existing 17.2x multiple).
Even though Alphabet does not pay a dividend, it more than makes up for that with massive buybacks. For example, last quarter Alphabet produced over $15.3 billion in FCF. But the company spent $13.3 billion on share buybacks.
In other words, most of the company’s FCF was spent on lowering its share account, rather than just piling up on its balance sheet. That helps improve its earnings per share and pushes up the stock price. Annually, it works out to over $53 billion on buybacks, or 3.54% of its market value. If the stock stays level, over 10% of its shares would be reduced in three years. That alone guarantees a higher price.
Undervalued Stocks to Buy: Microsoft (MSFT)
Market Cap: $2,01 trillion
Microsoft (NASDAQ:MSFT) recently lowered its guidance going forward. Microsoft cut its revenue and earnings outlook for its fiscal fourth quarter ending June 30.
However, this still puts EPS up 16.9% to $9.32 from $8.o5 last year. Moreover, analysts project 14% higher earnings at $10.74 for the June 2023 fiscal year. Many companies would die to have these kinds of forecasts, even after lower guidance.
At $268.75 as of June 6, MSFT stock is cheap at just 23 times forward earnings. But more importantly, the technology company produces massive amounts of FCF. Last quarter it generated over $25 billion in FCF in that quarter alone. That works out to an FCF margin of 100% on its revenue for the quarter.
Moreover, that is more than enough to cover the $8.8 billion in share buybacks it made last quarter. That works out to $35 billon in share buybacks annually, or 1.73% of its $2 trillion market capitalization. In other words, this is one of the top undervalued TMT stocks to buy going forward.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.