The hottest tech stocks of the pandemic era have largely turned into the biggest losers of the post-pandemic period. Some of the companies that saw their shares plummet have meaningful competitive advantages and could grow into tech giants in the coming years and decades. But expectations got out of hand, and the result has been a brutal reckoning.
While investing in the next big thing can be exciting, you're most likely going to be wrong. Instead of taking big risks, one option is to stick to old-school tech stocks. International Business Machines (IBM 1.05%) and Intel (INTC 0.64%) aren't particularly thrilling companies, and Intel specifically is facing a slew of problems. But both look like great long-term bets for investors willing to buy and hold.
International Business Machines
Century-old tech giant IBM has spent the past decade remaking itself for the era of cloud computing and artificial intelligence. The enterprise-focused company has landed on hybrid cloud computing as its core strategy. With the mega-acquisition of Red Hat in 2019, IBM's hybrid cloud platform is tough to beat.
Big enterprises with complicated IT infrastructures are unlikely to go all-in on a single public cloud. IBM is betting that its hybrid cloud approach, mixing on-premises hardware with multiple cloud platforms, will appeal to these enterprise customers. The strategy seems to be working so far: IBM's hybrid cloud revenue -- which encompasses hardware, software, and services -- reached $22.4 billion in 2022, up 17% year over year at constant currency.
In the same way that IBM's mainframe systems drive sales of software and other related products, the company's hybrid cloud platform can increase sales of the rest of its portfolio. IBM has a big consulting business, for example, generating $4.8 billion of consulting revenue in the fourth quarter of 2022 alone. Digital transformation accounts for nearly half of that total, with customers turning to IBM to help implement hybrid cloud strategies.
IBM shed its managed infrastructure services business in 2021, which represented a big chunk of slow-growing and low-margin revenue. A leaner IBM emerged after that transaction, and the company's growth prospects now look better than at any time in the past decade. Even in a tough economy, the tech titan expects to generate mid-single-digit revenue growth at constant currency this year, and it sees its free cash flow expanding by $1 billion to approximately $10.5 billion.
IBM is valued at just $117 billion today, or roughly 11 times that free cash flow guidance. The stock also offers a dividend that yields about 5%. A beaten-down valuation combined with a generous dividend and solid long-term growth prospects makes IBM a great stock to buy.
Intel
It may seem that not a lot is going right for semiconductor giant Intel right now. The PC market is undergoing a major correction following the pandemic-era boom, leaving the supply chain stuffed to the rafters with excess inventory. In the data center, Intel is losing market share to Advanced Micro Devices thanks in part to significant delays getting its latest Sapphire Rapids chips out the door.
In response to these challenges, Intel has instituted pay cuts for executives and managers, rolled out a plan to slash annual costs by as much as $10 billion by 2025, and gutted its dividend. The company's recent results have been abysmal: Revenue plunged 32% year over year in the fourth quarter of 2022, and the bottom line fell into negative territory.
While the short-term picture for Intel looks dire, the company is starting to get its groove back. In the PC CPU market, its Raptor Lake chips generally beat AMD's offerings in terms of raw performance and performance-per-dollar. By adopting a mixed-core architecture, with powerful cores paired with more efficient cores, Raptor Lake delivers market-leading single-threaded and multithreaded performance.
In the data center market, Intel finally launched its Sapphire Rapids chips earlier this year. The company has an aggressive road map, and it appears to be on track to deliver on it. Intel will launch Emerald Rapids this year and Granite Rapids next year, and it will roll out a new family of cloud-focused chips starting with Sierra Forest in the first half of 2024. Combined with an aggressive schedule of bringing new manufacturing nodes to volume production, Intel has a plan in place to regain data center dominance.
Outside of its own chips, Intel is investing in building out its own foundry services business. Notably, Intel recently struck a deal with Arm to enable Arm-based chips to be manufactured in its factories. Nearly every smartphone and mobile device, including Apple's iPhone, is powered by Arm-based CPUs. This deal opens the door for Intel to manufacture a large volume of high-performance mobile chips for other companies down the road.
Intel still has plenty of work left to do, but the company is on a path to regain its edge in the data center while building a foundry business that can rival industry giants TSMC and Samsung. Intel stock is a comeback story that every long-term investor should consider.
