Many investors might be wary about buying tech stocks as the market hovers near all-time highs. Some growth stocks are trading at lofty valuations, and the U.S. trade war with China remains unresolved despite promising steps in the right direction.
However, a closer look reveals that many tech stocks are still cheap relative to their growth potential. Let's examine three undervalued stocks that fit that description: Infinera (INFN 2.62%), Huya (HUYA -0.68%), and Micron (MU 2.92%).
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1. Infinera
Infinera's optical equipment helps carriers boost the capacity of their existing networks without laying down additional fiber. This technology helps carriers meet the growing bandwidth demands of cloud services and streaming media.
Fiber networks currently operate at 100G to 200G speeds over long distances, and about 400G to 600G at shorter distances. 600G speeds are expected to mature next year, followed by 800G upgrades in late 2020 and 2021. Infinera is one of the few companies that will launch 800G solutions next year.
Infinera struggled in the past because it was too highly exposed to the long-haul market when enterprise customers prioritized short-range upgrades. However, it rectified that issue by acquiring its rival Coriant, which gave it higher exposure to the short-range metro and DCI (data center interconnect) markets and gave it fresh ways to cut costs.
Infinera has allayed prior concerns about its growth with two straight quarters of accelerating revenue growth. Its gross margin expanded sequentially and annually to 33.1% last quarter, and it expects that expansion to hit 34%-36% in the fourth quarter as it outsources more of its chip production to Thailand.
After lapping its acquisition of Coriant, analysts expect Infinera's revenue to rise 10% next year as its losses narrow toward break-even levels. Infinera has already rallied 90% this year, yet the stock still trades at less than one times next year's sales -- which indicates that it's still a solid buy.
2. Huya
Huya is often called the "Twitch of China" since it's the country's largest video game streaming platform. Its monthly active users (MAUs) grew 48% year-over-year to 146.1 million last quarter. Its mobile MAUs climbed 29% to 63.8 million, and its total paying users rose 29% to 5.3 million.
Huya generated 95% of its revenue by selling virtual gifts on its live-streaming platform last quarter. Viewers buy those items as "tips" for their favorite broadcasters. The remaining 5% of its revenue came from online ads.
Huya was spun off from the larger video streaming company YY last year. It's been consistently profitable, by both GAAP and non-GAAP measures, over the past year, while its main rival DouYu International remains in the red. Tencent, the world's largest gaming publisher, is a major investor in both Huya and DouYu.
Image source: Getty Images.
Wall Street expects Huya's revenue and non-GAAP earnings to grow 37% and 76%, respectively, next year -- which are astounding growth rates for a stock that trades at just 22 times forward earnings.
Huya's growth will likely decelerate over the next few years, but it remains a "best in breed" investment on China's gaming market, which could still grow at a compound annual growth rate of 14% between 2019 and 2024, according to Research and Markets.
3. Micron
Micron is the world's third-largest maker of DRAM chips and fourth-largest maker of NAND chips. Samsung leads both markets, but it's diversified across other businesses, while Micron remains a "pure play" on memory chips. The chipmaker generated 63% of its revenue from DRAM chips last quarter, 31% from NAND chips, and the remaining 6% from other types of memory like NOR and 3D Xpoint chips.
Memory chip prices have tumbled over the past two years due to a supply glut, sluggish demand for PCs and mobile devices, and macro headwinds. However, Micron's stock rallied about 75% this year, even though it posted three straight quarters of double-digit sales declines with contracting gross margins.
That rally was sparked by Micron's quarter-over-quarter growth, which suggests that a turnaround will occur next year. On a sequential basis, Micron's revenue rose nearly 2% last quarter, as its DRAM and NAND revenues rose 1% and 5%, respectively. It expects its revenue to rise 3% sequentially next quarter -- which indicates that the long winter for memory chips is finally ending.
Analysts expect Micron's revenue to rise 22% next year and for its earnings to more than double. That's a rosy outlook for a stock that trades at just 11 times forward earnings, so investors looking for a rebounding cyclical play should consider buying Micron.
