The technology sector has really been the place to be in the market’s recent past. In the past decade, a wave of technological disruptions has dramatically changed all of our lives, based on smartphones, cloud computing and powerful Internet platforms. Unsurprisingly, the high-tech ETF Invesco QQQ Trust (NASDAQ: QQQ) massively outperformed the broader market:
QQQ 1 year Total Returns (Daily) data by YCharts
Despite the massive growth of technology, there are still great values to be found in the sector today. Here are three big tech companies that belong to your shopping list.
Image source: Getty Images.
Alphabet
Google search parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) skyrocketed after its fourth quarter earnings report last week. But do you know what? I think the stock is still undervalued.
Of course, 23% stronger than expected revenue growth and Alphabet’s massive massive earnings performance were good to see as the company recovered from the headwinds of COVID-19. But the real story was the first disclosure of the profitability of Google’s cloud unit.
In that sense, Google Cloud is accumulating heavy losses – much more than I expected:
|
Google Cloud Unit Metric |
2018 |
2019 |
2020 |
|---|---|---|---|
|
recipe |
$ 5.8 billion |
$ 8.9 billion |
$ 13.1 billion |
|
Operating profit (loss) |
($ 4.3 billion) |
($ 4.6 billion) |
($ 5.6 billion) |
Data source: Alphabet investor relations. Author’s graphic.
So why did Alphabet’s stock go up more, if the cloud unit is burning more money than previously thought? Because that means that the “core” businesses – Search, YouTube, Play Store and hardware – are all much more profitable than investors can imagine. These companies collectively achieved a colossal operating revenue of $ 54.6 billion last year, an increase of 11.4% over 2019. But remember, the COVID-19 pandemic severely affected results in the first two quarters of the year. year. In the fourth quarter, these businesses increased operating revenue by a whopping 41% over the fourth quarter of 2019.
Investors likely increased Alphabet’s shares after earnings because they value core business based on earnings, but still value cloud business based on sales. Since the core business is more profitable, investors can value it higher, while the value to the cloud business has probably not changed much. After all, many high-growth cloud software stocks are also accumulating heavy losses, but investors nonetheless bid on them for high valuations due to strong revenue growth.
Alphabet’s $ 1.39 billion valuation is just 25.4 times the operating revenue of Google’s top services for 2020, which in fact would be an excellent valuation based solely on that deal. Yes, the cloud lost $ 5.6 billion, and Alphabet’s “other bets” segment, including Waymo and Verily, burned another $ 4.5 billion. Still, both segments are likely to have a significant positive value.
Considering you’re basically getting these huge loss-making deals for free and Alphabet still looks like solid value, even after its post-profit bust.
Mobile tee
Mobile tee (NASDAQ: TMUS) reported strong results in the fourth quarter last week, but stocks fell a little later. Why? Potentially, investors may not have been impressed by the company’s 2021 orientation after a monstrous 2020, which saw T-Mobile’s shares rise 72%.
TMUS data by YCharts
Still, T-Mobile’s projection for 4 million to 4.7 million postpaid net adds next year would still be very strong. After all, its 5.6 million net adds in 2020 were the strongest in the company’s history and the best in the industry. In addition, T-Mobile has a history of orienting conservatively and exceeding expectations.
Meanwhile, the noise around the year-round orientation is just a distraction from the fact that T-Mobile has a 5G network lead over its rivals. In the last quarter, T-Mobile exceeded its goal of covering 100 million people with a 5G upper middle band spectrum, along with 280 million covered by a 5G slower low band.
This is a major advantage over its competitors and should be a differentiator as consumers upgrade to 5G phones this year. Combined with billions in future synergies as a result of the Sprint acquisition in 2020, T-Mobile is expected to see growth and expanding margins, not just in 2021, but in the years to come. Any setback can be an opportunity for long-term investors.
Super Micro Computer
Another undervalued technology company that has just announced earnings is Super Micro Computer (NASDAQ: SMCI). Super Micro manufactures customized servers for large data center customers, and this business was interrupted by COVID-19, both from a demand and supply point of view. In the last quarter, Super Micro’s revenue fell 5% year-over-year, but gained 9% quarter-on-quarter, showing a recovery from the slowdown at the beginning of the year.
However, Super Micro is about to increase sales beyond its original customer base. The company has just completed the construction of its campus in Taiwan, which will allow the production of large volumes of cloud servers at lower costs, opening up the large cloud computing market. In addition, Super Micro is starting to manufacture servers for the 5G / telco market, winning new customers last year and reaching higher volumes in 2021.
Super Micro saw its revenue momentum stall in the past two years when it had to deal with an accounting scandal, but the company cleaned up its books and was reclassified on Nasdaq a year ago. Now CEO Charles Liang is confident the company can grow again and has promised an analyst day when Super Micro will outline its goal of reaching $ 10 billion in revenue. To put it in context, this is more than three times what Super Micro does in revenue today.
Despite these optimistic growth prospects, Super Micro trades at just 10 times its 2022 profit estimates. This looks too cheap for a stock with the potential to triple its sales going forward. In addition, Super Micro has $ 270 million in net cash and has just authorized a $ 200 million share buyback program, so management is taking advantage while the stock appears to be for sale.