I'm sure I speak for most people when I say a good bargain is always appreciated. Whether it's a purchase as large as a house or car, or something as small as food or clothing, bargains make you feel like you're getting more bang for your buck. You don't have to go to the car lot or mall to find a bargain, either. You can also find them on the stock market.
There are always stocks trading below what many would consider their intrinsic value, and when you find them, they can produce great returns on investment. If you have $1,000 you can comfortably afford to invest now (meaning you already have an emergency fund saved and aren't carrying any high-interest debt), these two tech companies look like good bargains right now.
1. Alphabet
Google parent Alphabet (GOOG 1.33%)(GOOGL 1.17%) is one of the more intriguing big tech stocks. Despite being up close to 33% this year, the stock still seems like a bargain, especially compared to other "Magnificent Seven" stocks.
NASDAQ: GOOGL
Key Data Points
Although advertising is Alphabet's main moneymaker, a lot of its growth could ride on Google Cloud. In terms of its position in the cloud infrastructure space, Google Cloud's 11% market share is well behind Amazon Web Services (31%) and Microsoft Azure (25%), but Google Cloud's current size should help it turn the corner financially.
Cloud platforms have many fixed costs, including data center operations, energy consumption, and maintenance. Many of those costs remain relatively consistent regardless of the number of customers the platform has. So once a cloud platform reaches a certain size, economies of scale come into play, and profitability tends to get a major boost.
In the first quarter, Google Cloud's revenue grew 28% year over year to $9.6 billion. Arguably more important, though, was that its operating income grew to $900 million -- up from $191 million in the prior-year period. This jump in profitability helped Alphabet expand its operating margin by 7%.
GOOGL Operating Margin (Quarterly) data by YCharts.
Google Cloud won't catch AWS or Azure anytime soon, but now that it has turned the corner, it should be a growth booster for Alphabet. It won't remotely compare to the revenue that advertising brings in, but it has become a thriving business segment in its own right.
Alphabet's price-to-earnings ratio is around 28, which is below its average for the past decade. Given its growth potential and newly announced dividend ($0.20 quarterly), long-term investors could be receiving a bargain by investing at current levels. You'll likely be glad you did when you look back in some years.
2. Cisco Systems
Cisco Systems (CSCO 1.88%) is a hardware giant that makes products like routers, switches, and security devices that are crucial to network infrastructure. Unfortunately, its stock hasn't performed well lately -- it's one of the few big tech stocks that hasn't benefited from artificial intelligence (AI) mania.
NASDAQ: CSCO
Key Data Points
One problem Cisco has faced is that its major customers are overstocked on its hardware products, which decreases their need to upgrade or order more. Hardware accounts for much of its business, so Cisco's financials rely heavily on customers consistently upgrading their systems.
Customers keeping their existing hardware in use longer has weighed on Cisco's financials. In its fiscal 2024 third quarter (which ended April 27), revenue and GAAP earnings per share (EPS) were down 13% and 41% year over year, respectively, while non-GAAP EPS was down 12%.
CSCO Revenue (Quarterly YoY Growth) data by YCharts.
The good news is that EPS took a hit partly because Cisco finalized its $28 billion acquisition of Splunk, a software company that specialized in data analytics and cybersecurity. That purchase was part of Cisco's plan to become less dependent on hardware sales and more reliant on subscriptions that bring in recurring (and predictable) revenue.
Cisco's $6.9 billion in subscription revenue in fiscal Q3 was 54% of its total revenue, and its total annualized recurring revenue (including $4.2 billion from Splunk) was up 22% year over year. Those are both good signs for the company's direction.
Cisco is at a crossroads, but the company's focus on the long term makes it an intriguing choice for investors now, while the stock is valued as low as it is. Its price-to-earnings ratio of 15.8 is well below the S&P 500's average of 28.5. Add in the company's dividend, which at the current share price yields roughly 3.3%, and Cisco stock looks like a compelling choice for investors with long enough time horizons that they'll be able to wait out this transition. It won't happen overnight, but patience is key.
