The technology sector has played a leading role in powering the market's gains over the past couple of decades. New hardware, software, and services have driven changes in business and everyday life. Tech's ability to shape and influence almost every industry under the sun means the sector remains one of the best starting places for investors seeking big gains.
Cheap tech stocks to watch
After a brutal sell-off that began at the end of 2021, even some high-flying growth stocks might be considered a great long-term deal right now. And, for many older and slower-growing tech stocks, valuations are attractive. Here are eight "cheap" tech stocks that could deliver strong returns over the long term:
- Lumen Technologies (NYSE:LUMN)
- Applied Materials (NASDAQ:AMAT)
- Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG)
- T-Mobile (NASDAQ:TMUS)
- IBM (NYSE:IBM)
- Meta Platforms (NASDAQ:FB)
- Qualcomm (NASDAQ:QCOM)
- Broadcom (NASDAQ:AVGO)
1. Lumen Technologies
CenturyLink changed its name in late 2020 to Lumen Technologies as part of a broader effort to refocus its business and has been making progress under its new banner. Share prices increased 28% in 2021 but have fallen sharply so far in 2022, along with other tech companies. However, the stock remains cheaply valued (just three times trailing 12-month free cash flow as of this writing) and offers attractive characteristics for investors seeking big dividend payments.
Lumen is pivoting its core business from copper-based broadband services to high-performance fiber lines, which have a stronger demand outlook in the age of next-gen internet technologies. The company is also leveraging its position in enterprise internet services to explore growth opportunities in edge computing, cybersecurity, and collaboration software. This deep value stock could deliver big gains if the company's turnaround effort succeeds.
2. Applied Materials
Applied Materials provides the equipment needed to manufacture semiconductors. Many chip companies are cyclical, with revenue and profits ebbing and flowing with consumer and business demand. However, Applied Materials is a much more stable growth business model. New chip fabrication plants and expansion take years of planning, and their equipment requires ongoing service -- a source of revenue for Applied as well.
In addition to steady growth, along with the microchip manufacturing industry overall (accelerated especially by network-connected industrial equipment and electric vehicles), a push is being made around the globe to diversify and localize the semiconductor supply chain. Governments are allocating billions of dollars to promote new manufacturing capabilities at home. This bodes well for Applied Materials. The company consistently generates high operating profit margins and returns all of its free cash flow to shareholders via a dividend and share repurchases. The stock trades for just 17 times trailing 12-month free cash flow.
3. Alphabet
One of the FAANG stocks (large tech companies with big competitive advantages), Alphabet has gone from high-flying internet search technologist to value stock status. Alphabet's Google search business continues to chug along at a double-digit percentage growth rate and generates operating profit margins well into the 30% range. It uses this profitability to fund even higher-growth businesses such as YouTube and Google Cloud, as well as emerging technologies such as its self-driving car start-up Waymo.
Alphabet also has the largest cash and short-term investment (net of debt) balance of any public company at some $120 billion as of early 2022. Paired with its fast and steady expansion, there's a lot to like about Alphabet for the long term -- especially with shares trading for just 22 times trailing 12-month free cash flow and 17 times one-year forward expected earnings.
4. T-Mobile
After mobile phone services went mainstream in the 2000s and 2010s, mobile service operator growth has matured -- and valuations have gotten cheap. That includes the emerging leader in the new era of 5G, T-Mobile. Now boasting the most U.S. subscribers and still adding more, the company trades for 1.9 times trailing 12-month sales at the start of 2022 (compared to 1.4 for the sluggish but dividend-paying Verizon (NYSE:VZ)).
Mobile connectivity is increasingly central to business and everyday life, and it's likely that digital connectivity will become even more important through the next decade and beyond. T-Mobile is in the early stages of benefiting from the 5G revolution. Although by some metrics it still isn't profitable (negative free cash flow but positive net income) and doesn't pay a dividend, T-Mobile is the fastest-growing of the U.S. telecom giants.
5. IBM
IBM, a longtime tech giant, has been in need of some major transformation in recent years. But it is indeed transforming. It is focusing its operations on cloud and hybrid-cloud computing and spun off a big chunk of its legacy operation via Kyndryl Holdings (NYSE:KD) in late 2021. The new IBM has returned to growth mode and reported a high single-digit percentage sales rate to kick off 2022. It expects it can sustain a mid- to high single-digit revenue expansion rate over the next few years, all the while maintaining a high level of profitability.
IBM also pays a lucrative dividend, one it expects to be able to maintain now that it's refocusing on higher-profit cloud services. With shares sporting a dividend yield and a low P/E ratio (12 times on a one-year forward expected earnings basis), combined with the company's opportunities for gradual growth in emerging computing services, IBM could be a great buy for value-seeking technology investors.
6. Meta Platforms
Meta Platforms, the rebranded parent organization of Facebook, Instagram, and WhatsApp, has taken a hit as Apple (NASDAQ:AAPL) and other digital advertisers change how apps can track user activity on the internet. As a result, Meta trades for just 15 times trailing 12-month free cash flow as of spring 2022. The social media titan is undervalued compared to many other big names in the tech sector, and there's a good chance it could outperform the market over the long term if it can adapt its operations.
Besides making changes to its ad business, Meta is also investing heavily in virtual reality. The company thinks this could be the next big computing platform for consumers and businesses and is willing to play the long game in developing the technology. With billions of users around the globe, Meta can tap into the long-term growth of digital ads and use profits to foster growth in this area, as well as in other related areas such as e-commerce.
7. Qualcomm
Almost every smartphone on the planet contains some sort of Qualcomm chip in it, and, as mobility expands to encompass other devices (cars, smart-home devices, industrial equipment, etc.), Qualcomm is finding new avenues for growth. Yet, largely due to a widespread belief that Apple will eventually completely part ways with Qualcomm and use its own mobile chips for the iPhone and iPad, Qualcomm trades for less than many of its semiconductor industry peers.
In the spring of 2022, Qualcomm stock was valued at just 22 times trailing 12-month free cash flow, benefiting from a massive upgrade cycle in 5G devices. But, in the next few years, the company thinks it will experience a lot more growth from new mobility chip designs. Along the way, shareholders get treated to a modest dividend yield and share repurchases to sweeten the deal.
8. Broadcom
Broadcom is another value stock within the semiconductor industry, trading at only 17 times trailing 12-month free cash flow in early 2022. A giant in developing mobile circuitry and networking equipment, this is a slow-but-steady growth firm that gets a significant discount compared to some of its peers due to a large debt burden.
However, Broadcom has used debt to acquire complementary software services, and the business is a cash cow. It generates more than enough (operating profit margins of some 35%) to service interest payments, gradually pay down debt, and provide a solid dividend for shareholders. Semiconductors and related computing hardware and software are a secular growth trend, making Broadcom a solid technology value stock pick for the long haul.
Related investing topics
What to look for in tech stocks
Investors are generally well-served by keeping an eye on tech companies' sales and earnings growth, as well as valuation metrics such as price-to-sales and price-to-earnings ratios. There are many other useful stock metrics you can and should consider. For example, it's helpful to keep an eye on each company's number of active users or customer count, plus how much per-user or per-client sales and profit a business is generating.
The technology sector encompasses a vast array of companies providing a wide range of disparate products and services. There's no reliable one-size-fits-all approach for evaluating stocks in the space, but charting business momentum and keeping intrinsic value in mind can make it easier to identify winners.
