Last year's interest rate increases are reminding everyone about the merits of value investing, but that doesn't mean you should ignore tech stocks. While "tech" gets a bad rap due to many high-profile yet unprofitable companies -- mostly in the software or EV spaces -- many hardware companies are very cheap on a multiple of current earnings.
Even better, technology hardware infrastructure is the key enabler for many of today's big innovations, from artificial intelligence to industrial automation to electric vehicles and the smart grid.
Here are two dividend-paying hardware companies powering each of those big trends, and their stocks can be had at bargain-basement valuations today.
Kulicke and Soffa
Advanced packaging company Kulicke and Soffa (KLIC -2.04%) is known for its core ball bonder business, which attaches chips in packages or to an electronic circuit board. The highly cyclical business boomed over 2020 and 2021. However, with investors fearing a downturn in wire-bonding equipment sales going forward, K&S trades at just a 6.8 price-to-earnings (PE) ratio. Actually, even that low valuation underrates how cheap this stock is. K&S has about $775 million in cash and no debt, which amounts to more than a quarter of its market cap!
However, Kulicke and Soffa, while cyclical, should see higher highs and lows with time as semiconductors are now leaning more on advanced packaging to drive breakthroughs in power and performance. And new applications, such as electric vehicles, also need more packaging equipment.
Meanwhile, even chipmakers themselves are using advanced packaging techniques within individual processors. Leading logic chip designers have begun constructing complex chips through connected "chiplets" in which individual semiconductor functions are etched onto small sub-chips. The sub-chips are then stitched together in a modular fashion with advanced packaging techniques in various combinations.
Since processors have become more advanced and difficult to produce, Intel and Advanced Micro Devices each recently incorporated chiplet architectures into their most current processor designs.
In addition, K&S has an exciting new growth business in advanced LED displays, including mini- and microLED formats. Mini- and micro-LEDs are the next generation of high-end screens with quality advantages over traditional LCD and OLED screens. While mini-LEDs are now used only in the highest-end screens, such as televisions, as the technology matures, mini- and micro-LEDs could find their way into mainstream devices like PCs and smartphones.
On the last earnings call, CEO Fusen Chen noted that the company's advanced display tools business had already exceeded the company's internal targets for 2022. And just last week, Bloomberg reported that Apple (AAPL -1.13%) is pursuing in-house production of its own mini- and micro-LED displays. The move is another bid by Apple to bring more of its hardware production in-house and replace its existing OLED screens made by third parties.
According to people familiar with the matter, Apple intends to use mini-LEDs in high-end Apple Watches by the end of next year, with plans to potentially expand the advanced display technology to the iPhone later on.
Should Apple begin to use mini-LEDs in iPhone screens and adopt Kulicke and Soffa's technology to produce them, it could be a massive new business for this small-cap company.
Dell Technologies
There's a good reason Dell Technologies (DELL -1.88%) trades at just 6.5 times next year's earnings estimates: The PC market is in freefall. Just last week, tech research firm Gartner reported that PC shipments fell a stunning 28.5% in the fourth quarter -- the largest decline since the firm began collecting data in the mid-1990s!
That's likely factored into Dell's low valuation. Meanwhile, Dell's infrastructure segment, which sells servers, storage, and software to data center operators, actually surpassed the PC segment last quarter in terms of operating income. So the massive slowdown in PC and desktop sales won't affect Dell's overall results as much as some may think. While data center investment is projected to slow, it won't be by nearly as much as the PC slowdown.
Dell has also been selling more multi-cloud storage software of late, as well as other services not tied purely to hardware sales. Last quarter, services made up 23% of Dell's revenue and grew 6%, even as hardware products fell 10%. Overall, recurring services and software revenue should be less sensitive to the economic cycle.
More than one-third off its all-time highs, Dell should be able to continue growing its 3.2% dividend and repurchasing stock, even in these lean times. Once the company gets past this downturn, it should be able to capture opportunities in the data economy over the long term.
Management's model is to grow revenue at a 3% to 4% rate over the long term, with earnings-per-share growth of 6%. That may not sound like much, but since shareholders can buy Dell's stock today at a 16% earnings yield, it actually makes Dell attractive despite its various headwinds.
