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Three oversold tech opportunities for value hunters

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Written by: Thomas Fitzgerald
25/05/2016
Investment analyst Thomas Fitzgerald highlights three out-of-favour technology stocks investors shouldn't overlook.

Investors burnt by the dot-com bubble will attest to the tech sector’s volatile nature. Exciting ‘blue-sky’ companies can create highly speculative demand and innovation can rapidly change the trajectory of share prices.

Explosive growth stories will continue to entice investors, but share price capitulations have fostered a cautious approach among many over potential bubbles in the sector. This sensitivity has led to periods of indiscriminate selling and overreaction to negative news flow – even to reliable, established and cash-generative businesses.

Typically, as value investors, this type of overreaction gives us an opportunity to add or initiate new positions in companies we like at attractive valuations. Currently, we see opportunities in a number of household names who have been oversold, despite continuing to display profitability, financial strength and the ability to evolve to the changing dynamics of the technology sector. This includes the ‘internet of things’, networking, mobile technology and multi-media platforms.

Apple

The share price has fallen 28% from 2015’s February peak due to uncertainty over the future growth of iPhones, which account for 66% of sales. Beyond these near-term concerns, the anticipated launch of iPhone 7 will create fresh opportunity to take further market share. There is also still a large upgrade opportunity within its existing installed base (only 40% of iPhone users have upgraded to the new generation 6 or 6S models).

Continued strong cash generation and its balance sheet fortress will continue to support the company’s design and development over the long term. As a result, we believe shares are attractively valued at current levels. The company is also making significant progress towards a higher recurring, subscription-led revenue model through the launch of Internet and entertainment services, such as cloud storage, Apple Music and Apple TV. This could drive greater earnings visibility and potentially stronger profitability in future years.

Intel Corporation

Intel is the largest semiconductor company designing and manufacturing microprocessors and a variety of related products for technology devices, including PCs, tablets, smartphones and servers. It has developed industry-leading manufacturing technology which has enabled the company to establish a dominant market position. 2015 revenues from microprocessors equated to a 94% share of overall global microprocessor sales.

In recent years, the company has faced major headwinds, most notably weakness in the global PC market, which has hindered revenue growth – as a result Intel’s share price fell 5.1% in 2015 while the broader US tech market rallied 4.3%. However, given the company’s scale, technological leadership and financial strength (Intel holds $8.5bn in net cash), we believe the company is well-positioned to provide key technology that supports many of the major themes that are currently driving the digitalised world, including the explosion of data traffic, proliferation of mobile technologies and the evolution of the Internet-of-things.

One of the key areas for Intel has been within the company’s data centre segment, which produces chips for servers and contributes almost half of Intel’s annual profit. The strong secular market growth within data centre technologies, where Intel is dominant, has been driven by the buildout of the Internet, emergence of mobility in computers and new classes of data devices, such as tablets and smartphones.

Cisco Systems

Cisco is the undisputed global leader in networking infrastructure services. It boasts a sound business franchise with scale and profitability. It is strongly positioned to benefit from multiple product cycles and long-term secular trends driving data and connectivity growth.

It has faced increasing competition by Asian peers with lower cost structures, as well as emerging networking technologies, which threaten future revenue and profitability. Subsequently, Cisco’s share price performance has underwhelmed (over a two-year period, it is -2.4% relative to the broader US technology sector and 20% below 2007 levels). However, we believe these concerns are overblown. Cisco dominates the traditional networking equipment markets with an approximate 60% share globally and uses its vast scale to sell new technologies and defend its position. The company’s traditional products and services will also benefit from the exponential growth in data generation and rapidly increasing transfer speeds – driving significant demand for networking infrastructure and related services.

For this reason, we consider the current valuation of the stock to be undemanding (shares trade at a 27% discount to the US tech market). The stock also offers an attractive dividend yield of 4%.

Thomas Fitzgerald is an analyst at EdenTree Investment Management

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