Tech stocks generally aren't known for being "cheap", especially with the S&P 500 and NASDAQ both hovering near historic highs. But if you arrange the large cap tech stocks on the market by descending P/E ratios, you'll find three interesting names at the bottom of that list -- HPE (NYSE:HPE), HP (NYSE:HPQ), and Baidu (NASDAQ:BIDU).
HPE retained Hewlett-Packard's enterprise hardware and software businesses after splitting with the PC, printer, and imaging businesses last year. Like its rival IBM, HPE has struggled to grow its sales amid sluggish enterprise spending, macroeconomic problems, currency headwinds, and tough competition from smaller rivals.
To streamline its business, HPE exited the public cloud market, announced plans to spin off and merge its struggling IT services unit with Computer Science Corp. in an $8.5 billion deal, and plans to spin off and merge its "non-core" assets (application delivery management, big data, and enterprise security) with Micro Focus International in another $8.8 billion deal.
HPE now trades at just 9.8 times earnings, which is much lower than the IT services' industry average P/E of 21. Analysts expect HPE's revenue to fall 1% next year, but for its earnings to rise 7% on the extra cash generated from the spin-offs, buybacks, and other cost-cutting measures. HPE also pays a forward dividend yield of 1% -- which could get a boost next year from its stronger cash flows.
HP retained Hewlett-Packard's PC, printer, and imaging businesses after the aforementioned split. HP is still struggling with steep declines in those aging businesses, but it's scaling up its printing business with its $1.05 billion acquisition of Samsung's printing business, expanding into the high-end 3D printers market, and aggressively cutting costs and buying back stock to preserve its bottom line growth.
HP remains the second largest PC maker in the world after Lenovo, and IDC reports that it grew its market share year-over-year during the third quarter (19.7% to 21.2%) on its dominance of the U.S market and growth in Japan, Europe, the Middle East, and Africa. That growth was surprising since worldwide PC shipments fell 3.9% annually during the quarter.
HP currently trades at just 8.5 times earnings, which is much lower than the industry average of 13 for diversified computer systems companies. Analysts expect its revenue to fall 3% next year, and for its earnings to dip less than 1%. Despite being pegged with lower expectations than HPE, HP pays a much higher forward dividend yield of 3.4%.
Baidu is the top search engine in China. The company's days of double and triple-digit growth are over, but it remains the 800-pound gorilla in Chinese internet advertising. Baidu currently trades at just 12.2 times earnings, which is much lower than the industry average of 50 for internet information providers.
That's because the stock has remained under pressure this year from two main headwinds -- a government crackdown on "misleading" ads (especially for pharmaceutical products) across its network, and increased investments in integrating O2O (online-to-offline) services like mobile payments, ride hailing, and food deliveries into its mobile app.
Its sale of its stake in OTA Qunar to Ctrip also exacerbated those unfavorable year-over-year sales growth comparisons. Due to those challenges and adjustments, Baidu's revenue fell 0.7% annually last quarter, but its net income improved 9.2%. Analysts expect its revenue to rise 6% this year, but earnings are expected to decline 12% before returning to positive growth next year.
The key takeaways
A low P/E may indicate that a stock is undervalued, but it also means that investors aren't eager to back up the truck due to headwinds or unresolved issues. Surprise earnings misses could also inflate trailing valuations even as the stock stagnates or declines. Therefore, investors should take a closer look at HP, HPE, and Baidu, but better understand their strengths and weaknesses before buying any shares.