2020 was a great year for growth stocks, many of which became temporary safe havens during the pandemic. But this year, many growth stocks lost their momentum amid concerns about higher bond yields, inflation rates, and tough year-over-year comparisons for "pandemic stocks."
In response, many investors rotated from growth to value stocks. That ongoing trend could benefit three cheap tech stocks that still have plenty of upside potential: Seagate (STX 4.61%), Micron (MU 9.60%), and Baidu (BIDU 1.41%).
Image source: Getty Images.
1. Seagate
Seagate holds a near-duopoly in HDDs (hard disk drives) with Western Digital (WDC 8.57%), but it's often dismissed as a slow-growth company because HDDs face fierce competition from flash-based SSDs (solid-state drives), which are smaller, faster, more power efficient, and less prone to damage.
Seagate also didn't expand into the SSD market, as WD did with its takeover of SanDisk five years ago. Instead of entering the volatile SSD market, which would have exposed it to cyclical memory chip prices and intense competition, Seagate pivoted away from lower-capacity HDDs and developed more higher-capacity HDDs for budget-conscious enterprise, cloud, and data center customers.
As a result, Seagate's gross margin expanded as it sold more higher-capacity HDDs, and tighter cost controls boosted its operating margin and generated more fresh cash for buybacks and dividends.
Over the past decade, Seagate reduced its share count by 46% as WD's share count increased more than 30%. Seagate also continued to pay its dividend throughout the pandemic as WD halted its payments, and it's raised its payout over the past two years. It currently pays a forward dividend yield of 2.7%.
Seagate's revenue rose just 1% in fiscal 2020, which ended last July, but its adjusted EPS dipped 4% as the pandemic spread. Analysts expect its revenue and earnings to grow 1% and 9%, respectively, before accelerating next year. Seagate expects its gross margin to continue expanding throughout fiscal 2022 as it sells more higher-capacity HDDs, and the stock still looks cheap at 18 times forward earnings.
2. Micron
Micron, one of the world's top producers of NAND (flash memory) and DRAM chips, suffered a slowdown last year as memory prices declined and the pandemic disrupted several sectors. Its revenue dropped 8% in fiscal 2020, which ended last August, as its adjusted earnings plunged 55%.
Image source: Getty Images.
But in the first half of 2021, Micron's revenue and earnings jumped 21% and 43%, respectively, as memory chip prices rebounded amid surging demand from the mobile, gaming, PC, and data center markets.
5G upgrades, new gaming consoles, and stay-at-home trends all contributed to that growth, while the global semiconductor shortage curbed the production of new memory chips and boosted market prices. As a result, Micron is now selling its chips as quickly as it can produce them at elevated prices.
That's why analysts expect Micron's revenue and earnings to rise 26% and 96%, respectively, this year. Those are jaw-dropping growth rates for a stock that trades at just over seven times forward earnings.
The bears might claim Micron's stock is cheap because its business is cyclical, but it only passed its latest trough last year -- and the ongoing chip shortage indicates it's still far away from its next peak.
3. Baidu
Baidu, which owns China's top search engine, is also often dismissed as an also-ran in the country's crowded tech sector. The bears claim Baidu will struggle as China's internet users rely less on traditional searches and more on monolithic apps like Tencent's WeChat.
That's partly true, but Baidu has been expanding its ecosystem beyond online searches with its DuerOS virtual assistant, Smart Mini Programs that operate within its mobile app, its Apollo software platform for driverless cars, and its Baidu AI Cloud platform. It's also in the process of buying the live video platform YY Live from JOYY.
All those moves could help Baidu tether more users to its platform, reduce its dependence on traditional search-based ads, and widen its moat against Tencent, Alibaba, ByteDance, and other tech giants.
Baidu's revenue stayed flat in 2020, but its adjusted EPS grew 23% as it reduced its search engine's traffic acquisition costs. In the first quarter of 2021, its online marketing revenue rose year over year for the first time in eight quarters as the pandemic passed, and it expects that recovery to continue.
Analysts expect Baidu's revenue to grow 22% this year, but for its earnings to dip 4% as it ramps up its spending again. Its dependence on lower-margin businesses, including Baidu Cloud and its video platform iQiyi, could still exacerbate that pressure.
But over the long term, Baidu's AI, driverless, and electric vehicle investments could all eventually bear fruit. If that happens, the stock could be a bargain at 16 times forward earnings.
