In the world of investing, rarely do the terms "value stocks" and "technology" mix. After all, given the torrid pace at which technology evolves today, it's all too common to see shares of the most exciting tech companies pushed to extraordinarily high levels before falling back to earth.
But that's not to say you can't find solid underpriced stocks in the tech sector. To the contrary, here's why our contributors believe Cisco (CSCO +0.58%), Amazon.com (AMZN 0.87%), and International Business Machines (IBM 0.56%) represent promising candidates for value investors' portfolios.
Andres Cardenal (IBM): IBM is clearly offering an attractive entry price for investors. Big Blue carries a price-to-earnings ratio around 12.5 times earnings over the last 12 months, materially cheaper than the average company in the S&P 500 index, which trades at a price-to-earnings ratio in the neighborhood of 18.4.
Image source: IBM.
Dividend investors have good reasons to consider IBM, too. At current prices, the stock is paying a dividend yield of 3.6%, not bad at all coming from a business with a pristine trajectory of dividend growth over the decades. IBM has paid uninterrupted dividends since 1916, and it has increased distributions over the last 20 years in a row. This includes a vigorous dividend increase of 18% for 2015.
Revenue growth has been disappointing over the last several years, since the company is disposing its underperforming business segments in order to better focus on its most promising growth opportunities. This is arguably the main reason why IBM stock is so cheap.
Transformations are seldom easy, but IBM has the brand reputation and strategic resources to adapt to emerging industry trends. Besides, the company is making sound progress in crucial growth areas such as cloud computing. Revenue from IBM's cloud business grew by a staggering 70% year over year in the first half of 2015, generating nearly $8.7 billion in sales over the last year.
The company operates in a challenging and dynamic industry. However, if management can jump-start sales growth, IBM stock is offering considerable upside potential from currently depressed price levels.
Steve Symington (Amazon.com): Believe it or not, I think shares of Amazon represent one of the greatest bargains our market has to offer -- and, yes, that's despite the online retail giant's notorious lack of consistent bottom-line profits.
The thing is, Amazon CEO Jeff Bezos has always been clear about his company's primary focus on creating shareholder value through top-line growth, taking market share, and maximizing free cash flow. And that made perfect sense considering Amazon's retail business was inevitably destined to be a low-margin pursuit.
But many investors were pleasantly surprised when, in Amazon's most recent quarter, it crushed expectations by growing overall revenue 20% year over year, more than quadrupling free cash flow, and -- perhaps most detrimental to the persistent bear thesis -- demonstrated its ability to turn a solid profit thanks to explosive 81% growth from its higher-margin web services segment.
That's not to say Amazon won't shun future profits if it can find a better way to grow the business in the process. But if anything, those results should serve as a reminder to our impatient market of Amazon's impressive history of rewarding long-term shareholders for their patience. So in the end, even with Amazon stock up more than 60% so far in 2015, I'm still convinced Amazon.com is a compelling value stock in disguise.
Tim Green (Cisco): Tech stocks and value stocks usually don't mix, but networking giant Cisco is an exception. The company dominates the market for switches and routers, and it's quickly becoming a major force in both the server and cybersecurity markets. As a growing number of devices and objects connect to the cloud, producing untold quantities of data, Cisco is in a prime position to benefit, just as it did during the initial growth of the Internet.
Image source: Cisco.
Cisco's dominance allows the company to produce a tremendous amount of profit each year. During fiscal 2015, which ended on July 25, Cisco generated $9 billion of GAAP net income and $11.3 billion of free cash flow on $49.2 billion of revenue. While shares of Cisco may not seem all that inexpensive, given that the P/E ratio based on GAAP net income is about 14.5, the company's massive pile of cash skews the numbers.
Cisco currently has $60.4 billion of cash and cash equivalents on its balance sheet, along with $25.4 billion of debt. This leaves a net cash position of $35 billion, or a bit more than one-quarter of Cisco's total market capitalization. Backing out this net cash, Cisco's true P/E ratio is actually about 10.5. This makes Cisco one of the cheapest big tech stocks available.
Cisco's dominance in its core markets and its fortress balance sheet makes it a rock-solid tech stock. Like all technology companies, Cisco is facing its fair share of challenges, from slumping sales in China to software-defined-networking. But for a great tech company at a bargain price, look no further than Cisco.
