The technology sector is more dynamic than ever. Companies not investing enough in research and development will likely go into oblivion. I am not only talking about technology companies but entities across sectors that fail to adopt new innovations.
In the recent past, Nvidia (NASDAQ:NVDA) has grabbed headlines. As the market for AI swells, its stock remains a hot commodity. However, the focus of this column is on the lesser-known or under-the-radar technology stocks for multibagger returns.
Talking about the scale of growth, AI is expected to contribute up to $15.7 trillion to the global economy by 2030. Of that, “$6.6 trillion is likely to come from increased productivity, and $9.1 trillion is likely to come from consumption-side effects.” There will be multiple participants from the technology sector towards this growth contribution. The addressable market is, therefore, significant, and I am just talking about AI.
Let’s discuss three under-the-radar technology stocks that can be massive value creators.
Arm Holdings (ARM)
Arm Holdings (NASDAQ:ARM) was listed in September 2023 and has trended higher by 123% in 6 months. However, being a relatively new listing, ARM stock is still under the radar. Further, I believe the company will likely create immense value in the next five years.
As an overview, Arm Holdings develops and licenses central processing unit products and related technologies. Semiconductor companies and original equipment manufacturers are the end users of the company’s products.
For Q3 2023, Arm reported revenue of $824 million, up 14% year-on-year (YoY). For the same period, the company shipped 7.7 billion chips. It’s worth noting that the company’s trailing 12-month free cash flow was $724 million. Considering steady growth in license and royalty revenue, I expect annual FCF to be more than $1 billion in the next 24 months.
An important point to note is that until 2016, Arm was focused on general-purpose CPUs. Currently, the company has AI-enabled CPUs tailor-made for specific industries. These industries include IoT, consumer electronics, cloud networking, automobile and mobile. The addressable market is, therefore, significant for the coming years.
Amdocs Limited (DOX)
Amdocs (NASDAQ:DOX) provides software and services to the telecommunication and media industry globally. In the last 12 months, DOX stock has remained sideways and trades at an attractive forward price-earnings ratio of 13.7. Further, the stock offers a dividend yield of 2.14%. Given the fundamentals and industry growth potential, DOX stock is worth holding for the next five years.
For Q1 2024, Amdocs reported revenue of $1.25 billion and a record 12-month backlog of $4.21 billion. Further, the company reiterated its free cash flow outlook of $750 million for the year. It’s also worth noting that Amdocs has a liquidity buffer of $1.1 billion.
That is important to mention as Amdocs has been investing to stay ahead of the curve. The company has also pursued opportunistic acquisitions. As an example, Amdocs is working on Generative AI strategy acceleration. In February, the company expanded its partnership with Microsoft (NASDAQ:MSFT) to drive Generative AI innovation for the telecommunication industry.
Photronics (PLAB)
Photronics (NASDAQ:PLAB) is another undervalued technology stock to buy. Even after a rally of almost 75% in the last 12 months, PLAB stock trades at a forward price-earnings ratio of 13. I would bet on multibagger returns from the stock over an investment horizon of five years.
As an overview, Photronics is a global provider of photomask products and services. These photomasks are used in manufacturing integrated circuits and flat panel displays. The company also provides electrical and optical components.
For Q1 2024, the company reported muted revenue growth of 2% YoY to $216.3 million. However, the order rates have improved, which could translate into growth acceleration. For Q2, the company has guided for revenue of $231 million with an operating margin of around 28%.
Besides the numbers, I am bullish on the long-term growth outlook. With the incorporation of chips in IoT, 5G, crypto and consumer products, the demand for photomasks will remain in an uptrend. Further, Photronics is focusing on margin expansion, and as cash flows swell, PLAB stock is likely to trend higher.
On the date of publication, Faisal Humayun 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.
