A common mistake new investors make is assuming that a stock's price defines how "cheap" or "expensive" it is. In reality, a stock that trades at $10 can be expensive, but a stock that trades at $100 might be cheap -- since valuations define a stock's actual value.
Nonetheless, some investors prefer buying stocks with lower price tags, so they can buy them in "even lots" of 100 shares that are easier to track. For example, an investor who buys 100 shares of a $20 stock will make $1,000 if the stock hits $30.
Image source: Getty Images.
So today, I'll examine three tech stocks that trade under $20 and have good growth potential -- HP (HPQ +0.62%), AMD (AMD 3.46%), and STMicroelectronics (STM 5.73%).
The world's biggest PC maker
HP split with its enterprise hardware and software businesses, which became Hewlett-Packard Enterprise, in late 2015. The "new" HP retained the company's PC and printing businesses, which most analysts considered slow-growth ones.
Yet HP stock rallied nearly 30% this year, as its PCs gained market share amid a slumping market and its printer sales held steady. Gartner's latest numbers show that global PC shipments fell annually for 11 straight quarters, but HP's shipments rose for five straight quarters -- fueled by robust demand for its higher-end laptops and 2-in-1 devices. HP's printer sales have also risen steadily, thanks to rising demand for its industrial 3D printers and mobile printers. Its acquisition of Samsung's printing unit should further strengthen that business with multi-function copiers.
HP's Spectre laptop. Image source: HP.
Wall Street expects HP's revenue and earnings to respectively rise 7% and 3% this year. The stock trades at just 13 times earnings, compared with the industry average of 21 for PC makers. It also pays a forward dividend yield of 2.8%, which is supported by a low payout ratio of 35%.
An underdog chipmaker
AMD was once considered an also-ran chipmaker which was respectively losing ground to Intel (INTC 5.41%) and NVIDIA (NVDA 2.94%) in CPUs and GPUs. But the underdog chipmaker mounted a spectacular comeback over the past year.
Strong console sales boosted demand for its embedded systems on a chip, turning its enterprise, embedded, and semi-custom business into a pillar of growth. It launched new low-end "VR-ready" GPUs to challenge NVIDIA, as well as high-end Ryzen CPUs to counter Intel. Those GPUs dramatically lowered the price of virtual-reality rigs, and the Ryzen CPUs offered comparable performance as Intel's high-end chips at much lower prices.
As a result, AMD has posted double-digit annual sales growth for four straight quarters. Its losses narrowed, and it reported non-GAAP profits during two of those quarters. Wall Street expects its revenue and earnings to respectively rise 18% and 171% this year. AMD still faces plenty of challenges, and its forward P/E of 156 looks very pricey -- but the stock could be cheap if lands some more blows against Intel and NVIDIA.
An overlooked chipmaker
STMicroelectronics is a European chipmaker that produces a wide range of semiconductors for the automotive, industrial, security, and consumer-electronics markets. Its automotive business is its largest unit, and it's been growing rapidly on content-share gains in connected cars. It also manufactures EyeQ computer vision chips for Mobileye, which Intel is acquiring.
STMicro also produces motion sensors for smartphones, tablets, and smartwatches. It supplied motion sensors for iPhones and the Apple Watch and is reportedly supplying 3D imaging sensors for the iPhone 8. All these catalysts enabled STMicro to post double-digit annual sales growth for three straight quarters.
Analysts expect STMicro's revenue and earnings to respectively rise 15% and 183% this year. Those high growth figures support its trailing P/E of 41, which is higher than the industry average of 23 for semiconductor companies. Its forward P/E of 20 looks even cheaper. STMicro pays a forward dividend yield of 1.4%, and its low payout ratio of 57% indicates that it has plenty of room for future increases.
Prices don't matter; growth rates and valuations do
Shares of HP, AMD, and STMicro all trade below $20, but that price is meaningless relative to their valuations. Based on their valuations, HP is the cheapest, STMicro is pricier, and AMD is the priciest.
However, higher valuations also indicate that investors have higher expectations for a stock's growth. STMicro's auto and Apple-related boosts and AMD's comeback could give both stocks bigger gains than HP, which has less room to grow as the world's top PC maker.
