Many tech stocks soared last year as stay-at-home trends boosted demand for their products and services. And the tech sector's insulation from many pandemic-related headwinds amplified those gains.
But a lot of those gains evaporated this year as investors focused on reopening plays in a post-pandemic world. Rising bond yields exacerbated that sell-off as investors rotated from growth to value stocks.
That rotation might cause some investors to avoid all tech stocks, but there are still plenty of bargains in this sector. Let's examine three well-run tech companies that are still cheap relative to their growth.
Image source: Getty Images.
1. Juniper Networks
Juniper Networks (JNPR +0.00%) is often overshadowed by its larger networking hardware rival Cisco. However, Juniper still ranks third in the global router market and fifth in the switch market, according to IDC.
Being an underdog in two commoditized markets seemingly makes Juniper an unappealing investment, but the company has been aggressively expanding its portfolio of cloud-ready hardware and services to offset its slower sales of legacy service provider products.
Juniper's cloud-oriented business has grown over the past two years, and it expects that momentum to continue as more cloud providers upgrade their networks. Its total revenue stayed flat at $4.45 billion in fiscal 2020, but it grew 8% year over year in the first quarter of 2021 as cyclical demand for its networking hardware and services accelerated again.
Analysts expect Juniper's revenue and earnings to rise 5% and 10%, respectively, this year. However, its stock only trades at 14 times forward earnings and pays a high forward dividend yield of 3.1%. It only spent 63% of its free cash flow on its dividend over the past 12 months, so it still has plenty of room to raise its payout as it expands its cloud portfolio and higher-margin software business.
2. Alphabet
Alphabet (GOOG +0.33%) (GOOGL +0.49%), the parent company of Google, suffered a brief slowdown in ad sales during the pandemic last year. Yet it offset that slowdown with the growth of Google Cloud, and its advertising business was firing on all cylinders again by the end of the year.
Image source: Getty Images.
Alphabet's revenue and earnings rose 13% and 19%, respectively, in 2020. Tighter spending measures during the pandemic also boosted its full-year operating margin from 21% to 23%.
Wall Street expects Alphabet's revenue and earnings to increase another 30% and 51%, respectively, this year, as its ad and cloud businesses continue to expand in a post-pandemic world. Yet its stock only trades at 24 times forward earnings, which seems ridiculously cheap relative to its growth.
The recent rotation out of tech stocks, along with ongoing antitrust issues and Apple's recent actions against targeted ads on iOS, seems to be dragging down Alphabet's stock price. However, I believe Alphabet should easily overcome these issues and remain one of the world's most important tech companies for the foreseeable future.
3. Salesforce
salesforce.com (CRM 1.14%), the world's largest cloud-based customer relationship management (CRM) services provider, expects to at least double its annual revenue to more than $50 billion by fiscal 2026. It expects that growth to be driven by robust demand for automated and outsourced CRM solutions, as well as the expansion of the e-commerce, marketing, and analytics markets.
Salesforce's revenue and adjusted earnings rose 24% and 65%, respectively, in fiscal 2021 (which ended this January). Its business remained resilient throughout the crisis as big companies continued to tap its cloud-based services to reach customers and optimize their internal operations.
Analysts expect Salesforce's revenue to rise 21% this year, but for its earnings to decline 30% as it completes its upcoming takeover of Slack (WORK +0.00%). The short-term expenses from that $27.7 billion deal are weighing down the stock, but the integration of Slack's unified communications platform should ultimately improve Salesforce's cloud services.
Salesforce's stock price might not initially seem cheap at more than 50 times forward earnings, but that P/E ratio should contract after it fully integrates Slack and its profits rebound. In terms of revenue, it trades at less than eight times this year's sales, which makes it cheaper than many other cloud stocks.
The bottom line
Investors who can tune out the near-term noise should take a closer look at Juniper, Alphabet, and Salesforce. Juniper is an undervalued cyclical play that is starting a new growth cycle, Alphabet is an evergreen tech juggernaut, and Salesforce should benefit from the digitization of businesses for decades to come.
