Many tech stocks recently dipped after a hotter-than-expected inflation report for March dampened hopes for brisk interest rate cuts throughout the rest of the year. The escalating conflict in the Middle East and other geopolitical challenges are also likely causing many tech investors to wonder if it's time to "sell in May and go away."
That might be a prudent strategy, but there are still plenty of promising tech and tech-related stocks that deserve to be bought instead of sold in April. Three of those include AT&T (T -0.49%), Taiwan Semiconductor Manufacturing (TSM -0.43%), and Palo Alto Networks (PANW 0.37%).
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1. AT&T
Back in 2021 and 2022, AT&T spun off DirecTV, Time Warner, and many of its smaller media assets as it abandoned its ill-advised dream of becoming a media giant. Through those divestments, AT&T streamlined its core business, raised more cash to reduce its debt, and freed up more resources to expand its higher-growth 5G and fiber segments.
The slimmed-down AT&T gained 2.9 million wireless postpaid subscribers in 2022 and another 1.7 million postpaid subscribers in 2023. Its fiber division also saw over 1.2 million net adds in 2022 and 1.1 million net adds in 2023. The robust growth of those two segments offset the persistent declines at its business wireline division.
AT&T's revenue only rose 1% in 2023, but its free cash flow (FCF) climbed 19% to $16.8 billion and easily covered its $8.1 billion in dividend payments. Therefore, its high forward yield of 6.9% remains safe and should limit its downside potential.
AT&T's adjusted EPS dipped 6% for the year, and analysts anticipate another 8% decline in 2024 as it ramps up its infrastructure spending, but its shares look dirt cheap at 7 times forward earnings. This stock likely won't blast off anytime soon, but it could be a safe place for income investors to park their cash as interest rates peak.
2. TSMC
TSMC is the world's largest and most advanced contract chipmaker. Fabless chipmakers like Nvidia, AMD, and Apple all rely on TSMC to produce their smallest and densest chips.
In 2023, TSMC's revenue fell 4.5% in Taiwanese dollar (TWD) terms (9% in U.S. dollar terms), its gross margin contracted, and its EPS declined 17.5%. That slowdown was caused by the end of the 5G upgrade cycle in smartphones, sluggish demand for new PCs in a post-pandemic market, and macro headwinds for the data center space.
But in 2024, analysts expect TSMC's revenue and EPS to increase 24% and 20%, respectively, in Taiwan dollar terms. That growth will likely be driven by the expansion of the AI market, the stabilization of the smartphone and PC markets, and the mass production of its latest 3-nanometer chips. Its stock looks reasonably valued relative to those estimates at 20 times forward earnings, and it pays a decent forward dividend yield of 1.8%.
TSMC still faces competition from Intel, which is trying to catch up in the race to make smaller and denser chips, and concerns are brewing about a potential conflict between China and Taiwan. However, I believe that TSMC can stay ahead of Intel in this race and that the fears of a potential Chinese invasion are overblown.
3. Palo Alto Networks
Palo Alto Networks is one of the world's largest cybersecurity companies. It operates three ecosystems: Strata for its next-gen firewall and on-site network security tools, Prisma for its cloud-based services, and Cortex for its AI-powered threat detection tools. Prisma and Cortex, which it collectively calls its next-gen security (NGS) services, drive most of its growth.
Palo Alto's revenue rose 25% in fiscal 2023 (which ended last July), but it only expects 15%-16% growth in fiscal 2024. It blames that slowdown on macro headwinds, which made it harder to gain new customers, and a consolidation of its customers onto a single unified platform (through free trials and deferred revenue deals) to reduce their dependence on smaller cybersecurity companies. Analysts still expect its adjusted earnings to rise 24% for the full year.
Palo Alto's slowing sales disappointed a lot of investors, but its growth should accelerate again as the macro environment warms up, it wraps up its consolidation strategy, and it squeezes more revenue from its existing customers.
Palo Alto's stock might seem a bit pricey at 44 times forward earnings, but it's still cheaper than comparable cybersecurity companies like CrowdStrike and Zscaler, which trade at 76 and 53 times forward earnings, respectively. Therefore, this underappreciated market leader could still be a a great long-term play on the cybersecurity space.
