Although growth-oriented stocks have seen price pullbacks in recent weeks, a perception may remain that too few cheap stocks still exist in the tech sector. And even when investors encounter cheap tech stocks such as Intel (INTC -2.40%) or Verizon Communications (VZ 0.90%), they may perceive them as poor investments -- despite a low cost.
These perceptions may be outdated though because both companies have made changes to their business in recent years that could significantly boost revenue over time. That suggests potential investors might want to consider taking a closer look at Intel and Verizon before the markets bid these stocks higher. Let's find out a bit more about these two dirt-cheap stocks worth making a $500 investment in.
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1. Intel
Intel's price-to-earnings ratio of 10 comes in far below that of competitors like Advanced Micro Devices and Nvidia, which sell for 44 and 88 times earnings, respectively. Despite this low multiple, investors apparently have not seen many good reasons to buy Intel. With its lost technical lead and lackluster growth, investors have understandably bypassed the chip stock in favor of faster-growing peers.
However, since Pat Gelsinger took the CEO job in early 2021, Intel has made meaningful changes to enhance its competitiveness. One example is the company's $20 billion investment to add foundry capacity in Arizona.
One purpose of this decision is to compete with Taiwan Semiconductor Manufacturing (TSMC), Samsung, and others in the chip manufacturing business by founding Intel Foundry Services. This is a welcome relief to investors who feel nervous about the semiconductor industry's concentrated presence in Taiwan, a country that has always faced geopolitical threats from China. Taiwanese companies claim about two-thirds of the world's foundry capacity, according to TrendForce.
Additionally, Intel has made efforts to regain its industry lead. For now, it has contracted with TSMC for some of its production. Longer-term, Intel has also implemented process improvements that Gelsinger says can return the chipmaker to a manufacturing leadership position in 2025 and beyond.
Chip development cycles take three to five years. Hence, investors who buy now can only speculate as to whether Gelsinger will reach this goal. Moreover, Intel's prediction of $78 billion in 2021 revenue according to generally accepted accounting principles (GAAP) may represent a slight decrease from year-ago levels. Furthermore, the fact that the stock rose only 3% in 2021 may reflect red flags for Intel's future.
However, Intel still produces more revenue than both AMD and Nvidia combined. If Intel can regain its technical lead or attract a significant market share in the foundry business, its stock could experience considerable multiple expansion.
2. Verizon Communications
Like Intel, Verizon has appeared cheap for a reason for many years. Its subscriber growth lags that of T-Mobile US, and with T-Mobile also placing pricing pressure on it and AT&T, investors may perceive Verizon's 10 P/E ratio as deserved rather than cheap. Unless investors own Verizon for the 5% yield on the $2.56-per-share annual dividend, stockholders seemingly have few reasons to take an interest in the company.
Nonetheless, Verizon has won the most J.D. Power awards for network quality, receiving the nod for 27 straight years. It also invested $53 billion in C-band spectrum last year, more than its two peers combined, to maintain this edge.
This could become increasingly important as its massive 5G investment has not only sped up its service but also spawned a new business that few investors appear to appreciate. Verizon has actively begun to promote its network-as-a-service (NaaS) offerings. NaaS is a data subscription service that gives customers access to network infrastructure on demand.
For example, in retail, NaaS can help retailers move network infrastructure between their physical and online operations as needed, much like a homeowner might adjust a thermostat. This is an opportunity that did not exist under the 4G environment and could bring an additional source of income even if pricing pressure for services remains intense. The benefit extends to other industries as well. Honda Motor has utilized this to help operate autonomous vehicles, and Arizona State University has applied NaaS to immersive learning applications.
With 5G, Verizon may already have begun to experience improvements. Revenue in the first nine months of 2021 rose to just under $100 billion, climbing 6% compared with the first three quarters of 2020. Lower operating expense growth, falling interest costs, and rising income from finance-related operations help offset a higher income tax expense. Consequently, its net income for the first nine months of 2021 came in at $18 billion, 32% more than in the same period in 2020.
Admittedly, with its stock price down 12% in 2021, Verizon has attracted little interest. Nonetheless, the aforementioned 10 P/E ratio is far below T-Mobile's earnings multiple of 42. As NaaS becomes an increasingly essential service, Verizon could receive long-overdue appreciation.
