It might seem tough to find cheap tech stocks as the Nasdaq hovers near all-time highs. But if you take a closer look, you'll notice that plenty of promising tech stocks are still trading at surprisingly low valuations in this frothy market. Let's take a closer look at three of those undervalued tech stocks: Cisco (CSCO -0.37%), Ericsson (ERIC 3.14%), and Skyworks Solutions (SWKS 2.08%).
1. Cisco
Cisco is often considered a slow-growth tech stock, since it generates most of its revenue from networking switches and routers. Both markets are heavily commoditized, and Cisco's revenue grew at an anemic CAGR of 1.5% between fiscal 2017 and 2021.
Cisco experienced a slowdown during the pandemic as its enterprise and data center customers postponed their network upgrades. Its sales in China also declined sharply amid escalating trade tensions.
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But during its recent investor day, Cisco predicted its revenue and non-GAAP earnings would both increase at an average CAGR of 5% to 7% between fiscal 2021 and 2025.
That acceleration, which was foreshadowed in its strong fourth-quarter report in August, will be driven by the growth of its higher-margin subscriptions business and the expansion of its software ecosystem into newer markets like hybrid work, security, optimized applications, and automation. As the world's largest networking hardware maker, Cisco has plenty of ways to bundle together and cross-sell those services.
Cisco's stock trades at just 16 times forward earnings, and it pays a forward dividend yield of 2.6%. Its low valuation, high yield, and rosy outlook for the next four fiscal years make it a rock-solid investment.
2. Ericsson
Ericsson is tied with Nokia (NOK 6.11%) as the world's second-largest telecom equipment maker after Huawei, according to Dell'Oro Group. Ericsson and Nokia each held 15% shares of the market last year, while Huawei controlled 31%.
Ericsson and Nokia both benefited from U.S. sanctions against Huawei, which forced many government and enterprise customers to replace the Chinese tech giant's telecom equipment with non-Chinese products. Both European companies also profited from 5G upgrades across the world.
But Ericsson is arguably a better buy than Nokia, for three simple reasons. First, Ericsson's 5G expansion went smoothly as Nokia got bogged down in its costly acquisition of Alcatel-Lucent. Second, Nokia's longtime CEO resigned last year after struggling to expand the company's 5G business. Ericsson's current CEO has been in charge since early 2017.
Lastly, Nokia suspended its dividend last year to conserve more cash for its turnaround. Ericsson paid a healthy semi-annual dividend yield of 2% last year, and it will likely raise that payout again this year.
Ericsson has secured 144 commercial 5G agreements worldwide, and analysts expect its revenue and earnings to increase 9% and 11%, respectively, this year. Its stock trades at just 14 times forward earnings, making it a fairly cheap way to profit from the expanding 5G market.
3. Skyworks Solutions
Skyworks manufactures wireless and radio frequency chips for a wide range of markets. Apple, its top customer, accounted for 56% of its revenue in fiscal 2020, which ended last October.
Skyworks' revenue and earnings dipped 1% and 2%, respectively, in fiscal 2020 as the pandemic disrupted the mobile, automotive, and industrial markets. The trade war also prevented it from shipping new chips to Huawei, a top customer that previously generated 10% of its revenue back in 2017.
But this year analysts expect Skyworks' revenue and earnings to surge 52% and 70%, respectively, as Apple and other smartphone makers sell more 5G devices and the pandemic-stricken auto and industrial sectors recover. It will also benefit from its recent purchase of Silicon Labs' infrastructure and automotive unit, which will reduce its dependence on Apple and strengthen its portfolio of non-mobile chips.
Over the next few years, Skyworks expects the expansions of the Internet of Things (IoT), connected vehicle, and smart home markets to further diversify its business away from smartphones. It expects each new generation of those connected devices to require more of its wireless chips.
Skyworks trades at 16 times forward earnings and pays a forward dividend yield of 1.3%. That low valuation should limit its downside potential as it profits from Apple's growth and enters new markets.
