Editors note: The IBM section of this article was edited to include correct numbers and information for the company.
After suffering painful declines in 2022, many tech stocks surged higher beginning late last year and into the first quarter of 2023. It is not yet clear whether this is the beginning of a recovery.
Nonetheless, if investors have $3,000 or a similar sum to put to work, tech stocks such as Broadcom (AVGO 2.99%), Qualcomm (QCOM -0.20%), and IBM (IBM -8.25%) are in a position to drive returns with limited potential downside.
1. Broadcom
The company first became known as a business-to-business chip provider, collaborating with large clients to meet their needs. The best-known Broadcom solution among consumers is probably the one enabling the Wi-Fi hotspot in Apple's iPhone. But the company's broad portfolio of products and clients, is behind the company's rapid growth.
In 2018, it also began to diversify into enterprise software, and its proposed acquisition to buy VMware for $61 billion would dramatically enlarge that segment. The proposed VMware merger has come under regulatory scrutiny, making it unclear whether the acquisition will occur.
But the stock will likely prosper even if the acquisition does not gain approval. For fiscal 2022 (ended Oct. 30), its revenue of $33 billion marked a 21% increase from a year earlier. Over that time, the semiconductor solutions segment, which accounted for 78% of revenue, grew by 27%. In comparison, infrastructure software, which would absorb VMware, saw its revenue rise by only 4%.
That improvement helped its net income rise to about $11.5 billion for the year, up from $6.7 billion in 2021. A reduction in operating expenses boosted that profit growth despite a $910 million increase in income tax expenses.
Broadcom stock sells for about the same as a year ago after recovering lost gains. That does not include the dividend, which, after a recent increase to $18.40 per share annually, gives investors a 3% cash return.
And thanks to Broadcom's rising income, investors can buy this stock at only 21 times earnings. That valuation and growth should make it a bargain even if regulators do not approve the VMware purchase.
2. Qualcomm
You might not expect to see Qualcomm mentioned as a bargain stock, given its crucial role in communications. While it continues to lead the way in 5G, sluggish handset sales led investors to turn on the stock in recent months. They might have also become wary because Qualcomm continues to depend on China for 64% of its revenue in 2022.
But the world is in the midst of a 5G upgrade cycle, so it is likely most consumers will buy a phone with a Qualcomm 5G chip eventually. Moreover, the company continues to prepare for a time when fewer communications happen through handsets.
These moves include providing chips for Meta's Oculus VR headsets and building its Snapdragon Digital Chassis, which has attracted attention from automakers.
Still, the short-term struggles appeared in the financials for the fiscal first quarter of 2023 (ended Dec. 25). Revenue of $9.5 billion marked a 12% decline year over year. Falling handset sales and royalties accounted for the decline as other segments experienced rising sales. This is in stark contrast to fiscal 2022, when revenue increased 32% to $44 billion.
Consequently, in the first quarter, adjusted net income fell 27% to $2.7 billion as costs and expenses continued increasing amid the revenue drop.
The slowdown likely has put pressure on the stock price. Nonetheless, the $3 per share annual dividend and its 2.5% yield could prompt investors to give Qualcomm a serious look. Lastly, its price-to-earnings (P/E) ratio of 12 probably reflects that investors are pricing the aforementioned troubles into the stock, setting Qualcomm up for a possible rebound as conditions improve.
3. IBM
IBM might seem cheap given its recent history. The stock struggled for over a decade as its legacy businesses fought to attract growth. As a result, it lost more than one-third of its value over the past 10 years.
But the company seems to poised to change its fortunes. In 2019, a $34 billion acquisition of Red Hat took IBM headlong into the cloud. Arvind Krishna, the former division head who spearheaded the Red Hat purchase, became chief executive officer in April 2020 and followed up the move with more cloud-related acquisitions.
He also oversaw the spinoff of its managed infrastructure business into Kyndryl, which finally allowed IBM to return to consistent top-line growth.
In 2022, the company had $60.5 billion in revenue, a 6% increase from 2021. This included an 11% gain in hybrid cloud revenue. However, IBM transferred $5.9 billion in U.S. pension obligations to insurers. This one-time charge caused GAAP net income in 2022 to fall to $1.6 billion, down from $5.7 billion in 2021. That affected valuation negatively, taking the P/E ratio to 73.
Nonetheless, the forward P/E of 13 probably means it is not an expensive stock. Also, the $6.60 per year in annual dividend income offers a 5.1% cash return. A 27-year record of payout hikes means that the dividend will probably rise further. That payout should stand investors in good stead as IBM continues to transform itself.
