As the market hovers near all-time highs, it's no longer unusual for unprofitable tech companies to trade at over 50 times next year's sales. That frothiness should be a bright red flag for investors since it indicates the market is saturated with greedy speculators who are chasing hot stocks instead of doing their due diligence.
When the market finally crashes, those bubbly stocks will inevitably pop. Meanwhile, slower-growth, dividend-paying tech stocks that trade at lower valuations will likely remain resilient. Let's take a closer look at three companies that fit this description: Oracle (ORCL 0.49%), Cisco (CSCO 0.37%), and Verizon (VZ 2.85%).
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1. Oracle
Over the past few years, Oracle pivoted its on-site business software and databases to the cloud. That transformation was slow, even after it acquired NetSuite to accelerate the process, and Oracle was frequently compared to IBM as its sales growth stalled out and it trailed behind higher-growth cloud companies.
Oracle also spent billions of dollars on buybacks to squeeze out earnings growth from its stagnant revenue. That's why its revenue dipped 1% in fiscal 2020, which ended last May, but its adjusted earnings grew 9%.
But in the first half of 2021, Oracle's revenue rose 2% year over year as the growth of its cloud services -- especially its Fusion and NetSuite ERP (enterprise resourcing planning) services -- finally offset the slower growth of its legacy businesses. Its adjusted earnings also grew 16%.
Oracle expects that growth to continue in the third quarter, and analysts expect its revenue and earnings to grow 3% and 13%, respectively, for the full year -- which are solid growth rates for a stock that trades at just 13 times forward earnings. It also pays a decent forward yield of 1.6%.
2. Cisco
Cisco is the world's largest manufacturer of networking switches and routers. It often bundles its software applications and security software, which typically generate stronger sales growth than its hardware, with its devices.
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Cisco's revenue fell 5% in fiscal 2020, which ended last July, but big buybacks boosted its adjusted earnings 4%. Its hardware sales declined due to slower enterprise upgrades, market share losses in China, pandemic-related disruptions, and competition from rivals like Arista Networks, and offset the ongoing growth of its security business.
Cisco's revenue fell another 9% year over year in the first quarter of 2021, and it anticipates another 0%-2% decline in the second quarter. That outlook seems bleak, but its declines could gradually bottom out as the pandemic passes and enterprise customers resume their network upgrades.
Analysts expect Cisco's revenue and earnings to each dip by 1% this year. But next year, they expect its revenue and earnings to rise 4% and 6%, respectively, as the cyclical tailwinds strengthen. Its stock remains cheap at 14 times forward earnings, and investors can collect a forward yield of 3.2% as they wait for its business to finally recover.
3. Verizon
Verizon, the largest wireless carrier in America, trades at 11 times forward earnings and pays a forward dividend yield of 4.6%. Unlike AT&T, (T 1.17%), Verizon isn't trying to transform itself into a media juggernaut. Instead, it generates most of its revenue from its wireless business, which will likely benefit from rising sales of 5G devices this year.
Verizon's revenue dipped 3% in 2020 as the pandemic throttled sales of new devices, its smaller pay-TV unit shed subscribers, and its Verizon Media unit (which includes Yahoo and AOL's assets) posted weak growth in ad revenue. However, its adjusted EPS still grew 2% as it cut costs throughout the crisis.
In 2021, Verizon expects its wireless service revenue to rise at least 3% as new 5G devices hit the market and its smaller advertising business stabilizes, and for its adjusted EPS to rise 2%-5%. By comparison, AT&T expects its revenue to rise 1% in 2021 as its earnings growth merely remains "stable" from the previous year. Those strengths make Verizon an easy stock to buy, hold, and forget in this tumultuous market.
