More than any other sector, tech has shaped the stock market's performance over the last decade, and its influence in the financial sphere has never been more apparent. Despite unprecedented challenges stemming from the coronavirus pandemic, the S&P 500 index closed out 2020 up roughly 16.3%, an impressively resilient performance driven by technology-centric companies.
While the pandemic created catalysts that resulted in huge gains for many technology stocks, there are still promising companies in the sector that trade at discount valuations. Read on for a look at three cheap tech stocks that look poised to deliver market-beating returns.
1. Zuora
Whether you have software such as Microsoft's Office suite, a video-streaming service such as Netflix, a premium e-commerce offering like Amazon Prime, or any number of other services, there's a good chance that you're registered for at least one subscription-based service. Building recurring revenue streams has become a core focus for many of the world's top companies over the last decade.
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More importantly, the growth of the subscription economy is still in its very early stages. Zuora (ZUO 2.87%) is helping drive that growth, and it looks cheaply valued with a market capitalization of roughly $1.7 billion and a forward price-to-sales multiple of approximately 5.6.
Zuora provides a software platform that lets high-volume businesses easily implement and scale subscription orders, billings, and related services. The software-as-a-service (SaaS) company already counts industry leaders including DocuSign, Zoom Video Communications, and Zendesk among its customers. And it has promising avenues to long-term growth as it brings more clients on board and benefits from the growth of their businesses.
Subscription-based models tend to make revenue more reliable. Stickiness for services also reduces the need for spending on marketing and customer retention, and it tends to make subscription-based businesses more profitable over time. The combination of more predictable and more profitable will be almost irresistible for many industries and businesses, and Zuora stock gives investors an opportunity to benefit from the general momentum behind the transition to subscription models.
2. AT&T
AT&T (T 1.88%) trades at just nine times this year's expected earnings, and shares pay a dividend yielding roughly 7.2%. The stock trades at levels that aren't far removed from 10-year lows, and the telecom giant has yet to see any meaningful upside from the rollout of its 5G network technologies.
The share price has fallen roughly 25% over the last year and looks cheap despite recent challenges. Coronavirus-related headwinds have prompted weaker performance for the company's enterprise services segments and major challenges for the Time Warner entertainment businesses. The HBO Max streaming service also got off to a somewhat underwhelming start last year, and cord-cutting trends accelerated at the already struggling DIRECTV unit.
The problem points at AT&T are well documented. But the company is on the verge of benefiting from 5G tailwinds, and it has other avenues to topping the market's expectations.
DIRECTV probably isn't going to be a big part of AT&T's future whether the company chooses to significantly divest from the unit or not. On the other hand, the Time Warner entertainment business is still underappreciated, and it has the potential to deliver transformative momentum now that management is pursuing a more aggressive, streaming-focused approach.
AT&T's execution has been underwhelming in some respects, but the company still has opportunities to combine its strong positions in wireless service and entertainment to drive growth. The stock is cheaply valued and sports a great dividend, and shares could see impressive gains if the telecom giant can better leverage its strengths.
3. Glu Mobile
Glu Mobile (GLUU) is a player in the red-hot video game space, and its stock exemplifies the concept of growth at a reasonable price. The company has a market capitalization of roughly $1.5 billion, and it's valued at just 2.5 times this year's expected sales and 16.5 times expected earnings. These valuation metrics look very attractive in the context of the company's individual strengths and strong growth trends for the interactive entertainment industry at large.
In addition to trading at relatively low price-to-sales and price-to-earnings ratios, Glu Mobile has a strong balance sheet, with roughly $318 million in cash and zero debt at the end of the last quarter. The company will likely be deploying some of that cash to acquire new development studios in the near future, and smart acquisitions have the potential to accelerate the company's growth and push its share price significantly higher.
With its combined lineup of original intellectual properties and licensed titles, Glu estimates that its bookings will grow between 8% and 10% in its new fiscal year. Management has also said that the company plans to launch four new intellectual properties this year. The small-cap gaming publisher looks to be on the verge of an exciting new growth phase, and its stock is trading at low-risk, high-reward prices.
