After outperforming for the last three years, technology stocks have had a big pullback in 2022 due to inescapable macroeconomic headwinds. In response to surging inflation, the Federal Reserve has signaled an aggressive plan for hiking benchmark interest rates this year, and will soon begin shrinking its balance sheet via bond sales. Reflecting this, the yield on the 10-year U.S. Treasury has risen more than a full percentage point year to date, from 1.62% to 2.73% as of this writing.
That rise in long-term interest rates has generally clobbered high-multiple growth stocks. But beyond that, some fear the Fed could move too energetically in its efforts to stem inflation and induce a recession. Worries on that score have led the market to bid down the values of lower-multiple, cash-generating tech sector stalwarts like the FAANG stocks and semiconductor players, too.
But with the Nasdaq down some 17% from the high it touched in November, there are bound to be some bargains available now. These three premier tech names enjoy competitive advantages and long growth runways, and also sport cheap valuations, making them screaming buys today.
Meta Platforms is staggeringly cheap
There's a lot of pessimism baked into Meta Platforms' (META 2.20%) stock price these days. Among the many issues in play are concerns about the whistleblower scandal of last October, the company's much-derided name change, upgrades to the iOS mobile operating system that increased user privacy and reduced Meta's ad-targeting capabilities, and the high costs associated with policing the platform.
With all of that on investors' minds, it's no wonder Meta Platforms is down 42% from its all-time high.
So why is Meta a screaming buy right now? Because all of this bad news appears to be priced into the stock. Currently, it trades at just 15.5 times trailing earnings, and even that earnings figure was depressed by about 20% due to the company's $10 billion investment into its metaverse aspirations. Factor that in, as well as the nearly $50 billion in cash Meta has on the books, and we are talking about a low-double-digit price-to-earnings ratio for the core Instagram and Facebook platforms, as well as WhatsApp, which is likely under-monetized.
That seems like far too low a multiple. While many have pointed to video-focused social platform TikTok as a competitive threat, there is still no better way to keep up with friends than through Instagram and Facebook. While Meta's highest growth days may be behind it, these platforms will generate huge profits for years to come, allowing it to invest in its efforts to help create the metaverse while also repurchasing stock.
And of course, there's always a chance this metaverse thing does take off. Every monumental innovation in history has had its naysayers. But if metaverse applications gain traction over the next few years, so will Meta's stock price.
Micron's chips are indispensable for our digital future
If you think Meta is cheap at a price-to-earnings ratio in the low teens, wait till you see Micron Technology (MU -0.10%). One of only three major producers of DRAM (dynamic random-access memory), and one of only five major NAND flash memory producers, Micron is a powerhouse within the global oligopoly for memory chips, which will see rising demand for decades.
So why does Micron trade at just 9 times trailing earnings? Well, growth in the memory market doesn't happen on a consistent basis, so Micron is tagged with a reputation for being highly cyclical.
That's why even though it beat expectations and offered strong guidance when it reported on its fiscal Q2 on March 29, the stock has fallen by 10% since then and is down 22.6% on the year.
Even though memory prices tend to fluctuate with supply and demand, there are a few good reasons to think Micron will be more consistent in the future. First, demand for memory is increasing and broadening. While the memory market used to be concentrated in computers, and then later in mobile phones, more and more applications are becoming digitized and hungry for memory. Cloud data centers, factory automation, and autonomous electric cars will all demand a growing quantity of memory per unit as time goes on, providing new and diversified legs of revenue growth for Micron and its peers.
So even if there is softness in one area of technology, there could be a pickup in another. For instance, although the market is currently worrying about a post-pandemic slowdown in PC sales, CEO Sanjay Mehrotra said on Micron's latest conference call that strong demand for enterprise desktops is offsetting the slowdown in the consumer segment.
Second, production capacity for chips is becoming more difficult and expensive to bring online. While that means memory companies will need to devote significant sums to buying the machines they require, it also means that the players, as a group, are less likely to over-supply the market by as much as they have at times in the past.
Finally, under Mehrotra's tenure, Micron has out-executed rivals over the last few years, and has pulled ahead of competitors in mass-producing the most leading-edge memory chips. That should mean Micron's profitability should improve relative to its competitors.
T-Mobile: The best 5G at the lowest price
Wireless network operator T-Mobile (TMUS -0.56%) is one of the rare tech stocks that's actually doing reasonably well in 2022, up 12.5% on the year, although still 11.5% off its all-time highs.
Trading at 54 times earnings, T-Mobile may not seem like a bargain, but it sports that high ratio because its GAAP earnings are depressed due to the integration expenses associated with its 2020 acquisition of Sprint. This year, management expects free cash flow to rise by more than 30% as more synergies are realized. And free cash flow should continue to rise next year as well, as management says the company is on track toward its long-term goals. At T-Mobile's 2021 analyst day, it forecast free cash flow in the $13 billion to $14 billion range in 2023. Given its $164 billion market cap today, that gives it a 2023 price-to-free-cash-flow ratio of just 12 to 13.
T-Mobile has a massive two-year lead in 5G deployment, thanks to the valuable mid-band spectrum that Sprint brought with it. Mid-band offers a happy medium of range, reliability, and speeds markedly higher than those available from 4G. The deployment of its 5G network is also allowing T-Mobile to enter the market for wireless broadband service, which is a massive opportunity. Not only that, but since T-Mobile has traditionally offered lower prices than competitors, the value proposition of better 5G service for a lower price could spur cash-strapped consumers to switch to the "Un-Carrier."
Despite its run this year, T-Mobile still looks like a bargain here, so investors shouldn't hesitate to pick up some shares to hold onto for the long haul.