Some investors and analysts associate the tech sector with pricey, speculative stocks. However, not all tech companies trade at expensive valuations. Some tech stocks like Lumen Technologies (LUMN -5.15%), Qualcomm (QCOM 0.69%), and Verizon Communications (VZ -0.66%) not only trade at low multiples, but also utilize cutting-edge technology to drive sales and, hopefully, investor gains.
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1. Lumen
Admittedly, Lumen became cheap for a reason over the past several years. Customers cutting landline phones and cable TV services sent shares plummeting, leading to single-digit stock prices and dividend cuts. However, the company has now redirected its focus, offering edge computing, cloud, infrastructure, network, and security services. It also supports wireless providers such as T-Mobile, serving as the backbone of 5G networks.
Its stock has risen by more than 32% over the last year, and it's valued relatively fairly at just eight times earnings, well below the technology sector's average P/E ratio, which stands at 39, according to Fidelity.
Struggles with revenue may explain why Lumen still trades at a low multiple. Revenue fell 4% in the first quarter, compared to 12 months ago, to just over $5 billion. In fiscal 2020, it dropped 3% from year-ago levels to $20.7 billion.
Fortunately, free cash flow of $2.8 billion in 2020 and $809 million in Q1 have allowed it to cover quarterly dividend expenses of $274 million. This dividend, which pays $1 per share annually, yields about 7.7%, well above the average yield for the S&P 500 of 1.3%.
The company has also used its free cash flow to reduce and refinance its massive debt. Indeed, $31.4 billion is a heavy debt burden for a company with $11.3 billion in stockholders' equity (the value of the company after subtracting liabilities from assets). Nonetheless, long-term debt has fallen by $4 billion since Q1 2019.
Although revenue gains remain elusive for now, the balance sheet continues to improve, and investors earn a generous cash return. If this trend continues, Lumen may not have a reason to stay this cheap for much longer.
2. Qualcomm
Qualcomm prospers by maintaining wireless patents that give the company an edge in smartphone chipsets. Consequently, Qualcomm receives a cut on every smartphone chipset in the world.
Admittedly, companies such as Taiwan-based MediaTek have become a competitive threat. However, thanks to its 5G-capable Snapdragon 888 and upcoming Snapdragon 888 Plus processors, it holds a technical lead in a market expected to grow at a compound annual growth rate of 69% through 2028, according to Grand View Research.
This 5G upgrade cycle helped increase revenue for the first six months of fiscal 2021 to $16.2 billion, a 57% increase from the first six months of 2020. Also, net income surged by 203% during that period to $4.2 billion. Smaller increases in the cost of revenue and operating costs along with positive investment-related income helped to boost earnings.
Qualcomm projects between $7.1 billion and $7.9 billion in revenue for Q3. This will lead to an increase of between 49% and 62%, if the forecast holds. That also amounts to a considerable return when considering the stock sells for approximately 20 times earnings.
Additionally, the $5.1 billion in free cash flow over the first six months easily covered $1.5 billion in dividend costs. That $2.72 per share annual payout produces a cash return of 1.9%. Considering the stock price rose by nearly 60% over the last 12 months, the 5G upgrade cycle and the low multiple make the Qualcomm value proposition difficult to match.
3. Verizon
Value investors may also take an interest in a telecom provider like Verizon, which is locked in a battle with T-Mobile and AT&T to provide 5G services. In January, for the 26th consecutive time, Verizon earned the title of the most-awarded brand from J.D. Power for network quality. To keep up with consumers' quality expectations, Verizon made a $45 billion investment in C-Band spectrum in the first quarter of this year. Spectrum amounts to real estate for wireless frequencies, and this buys Verizon usage rights. Thus, it can utilize such "property" to improve the quality of its 5G service.
Furthermore, 5G appears poised to make Verizon a network-as-a-service (NaaS) provider, something not possible with 4G technology. This provides network infrastructure services as a subscription-based model to enable and connect applications. This will power artificial intelligence (AI), virtual reality (VR), and Internet of Things (IoT) applications, among other things. In its Q1 2021 earnings call, Verizon cited Honda's self-driving cars and immersive learning at Arizona State University as examples of activities this service supports.
Verizon stock's price-to-earnings (P/E) ratio of 12 reflects the company's recent struggles. In 2020, revenue fell 3% compared with 2019 levels. This occurred mostly because service revenues fell only slightly while wireless equipment revenues plunged 15% during that period amid a drop in activity during the pandemic. This seems to have changed in the first quarter of 2021, as wireless equipment revenue surged 20% compared with year-ago levels. Still, with the 4% year-over-year increase in overall revenue during that time, investors may have little incentive to bid the earnings multiple higher.
Nonetheless, Verizon pays investors well to wait for a recovery. Its $2.51 per share annual dividend yields a cash return of 4.5%, making it one of Warren Buffett's highest-yielding dividend stocks. In 2020, $23.6 billion in free cash flow made the $10.2 billion in dividend expenses manageable, even with $18.2 billion in capital expenditures. The company has raised its dividend every year since 2007, increasing the likelihood that a 2021 dividend hike will come.
Such a payout along with a burgeoning NaaS business may give patient investors good reason to take a chance on Verizon.
