Thanks to a bull market that has favored tech stocks, investors rarely get a chance to buy quality tech businesses without paying up these days. Yet two well-known names -- Salesforce (CRM -2.39%) and Verizon Communications (VZ -0.01%) -- arguably stand out as good tech stocks to buy.
Salesforce may not be cheap by value investing standards, which include a low price-to-earnings or price-to-book ratio. But for a company growing at meaningful rates with expanding profitability and rising cash returns (via dividends and share repurchases), it looks very attractive. In other words, it's cheap for a tech stock of its caliber. Verizon, by contrast, is just plain cheap -- a cash-rich, utility-like tech business whose dividend alone offers a decent return.
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Salesforce: A compounding growth machine
With shares falling about 27% year to date, it may finally be time to pull the trigger on Salesforce.
The company, which pioneered the software-as-a-service business model and primarily offers customer relationship management solutions, has continued to post strong financial results, even as its shares have declined. The company's latest quarter showed healthy, recurring growth and disciplined costs. Specifically, its fiscal second-quarter revenue rose 10% year over year to $10.2 billion, driven by an 11% increase in subscription and support revenue. Additionally, the software giant's current remaining performance obligations (RPO) -- a near-term demand indicator -- increased 11%.
Its profitability looks exceptional. Salesforce's fiscal second-quarter GAAP operating margin was 22.8% and its non-GAAP operating margin reached 34.3%. As Salesforce raked in cash during the quarter, it paid some out as well. The company returned $2.6 billion to shareholders, including $2.2 billion of buybacks and $399 million in dividends.
Management's full-year outlook for the company points to continued margin discipline alongside high-single-digit revenue growth.
But the call-out figure from the quarter was the company's progress on the artificial intelligence (AI) front. Salesforce's data cloud and AI annual recurring revenue hit $1.2 billion in the quarter, up 120% year over year.
The company's double-digit top-line growth, combined with huge momentum in cloud and AI, shows why Salesforce, despite trading at about 36 times earnings as of this writing, looks attractive.
Verizon: A cash-cow value stock
On the surface, Verizon looks pretty sad. The mobile network company's operating revenue increased just 5.2% year over year to $34.5 billion in the most recent quarter. But that growth is great in the context of the stock's valuation. As of this writing, shares trade at less than 10 times earnings. So, with that in mind, let's dive deeper and see why this cheap tech stock might be worth a spot in your portfolio.
Behind its 5.2% top-line growth was a 2.2% increase in its wireless services revenue, which came in at $20.9 billion. Its wireless equipment revenue rose 25.2% year over year to $6.3 billion.
With two quarters of the year down and two more to go, management guided for full-year adjusted earnings-per-share growth of 1% to 3%, and projected free cash flow of $19.5 billion to $20.5 billion -- not bad for a company with a market capitalization around $175 billion.
That free-cash-flow target highlights the backstop for the company's quarterly dividend, which was recently lifted to $0.69 per share, marking a 19th consecutive annual increase. With annual dividend payments amounting to around $11.5 billion annually, Verizon's roughly $20 billion of expected free cash flow easily covers the company's dividend.
Free cash flow is cash flow remaining after both regular operations and capital expenditures are taken care of, so this leaves a lot of cash flow for one of the company's main financial priorities: paying down debt. Verizon is reducing leverage over time; total unsecured debt was about $119.4 billion at quarter-end, and strong cash generation gives the company flexibility to keep paying off debt.
Different companies; both good buys
Salesforce and Verizon couldn't be more different. Verizon's business is growing slowly, but the stock helps make up for this with a cheap valuation and a 6.3% dividend yield as of this writing. On the other hand, Salesforce consistently grows its top and bottom lines at robust rates, and it has a small part of its business growing at a triple-digit rate. But investors have to pay a higher price to get into this growth story. Still, Salesforce and Verizon do have one thing in common: They're both cheap relative to underlying fundamentals.
Of course, neither investment is perfect. They both come with risks. Salesforce's valuation is high enough that investors will have to watch the company's growth rates closely. If its core business sees its growth rate start slipping, or if its nascent data cloud and AI business doesn't continue growing at impressive rates, shares could prove to be overvalued. Further, Verizon's high debt load makes execution key. Unexpected headwinds could be major setbacks if they prevent the company from making further progress on its debt paydown.
Overall, these stocks arguably look extremely attractive relative to their underlying business performance.
