In this article we will take a look at the top 10 undervalued tech stocks. You can skip our comprehensive analysis of the technology industry and go directly to the Top 5 Undervalued Tech Stocks.
The technology sector is one of the few areas of the industry where big and small players compete for relevance on a regular basis. Companies of all sizes, from startups to trillion dollar multinationals, are in fierce competition for the development and distribution of technology-related goods and services. Over the past year, the NASDAQ Composite Index, an index measuring the performance of all NASDAQ-listed stocks, has doubled the total returns of the S&P 500. This is a massive boom for tech companies and their shareholders.
Some analysts have described the increased interest around tech stocks as a bubble that is going to burst and bring the whole market down as technology firms now make up more than 20% of the S&P 500. The share of Apple Inc. (NASDAQ: AAPL) alone makes up close to 6% of this figure. Even initial public offerings of tech firms are raking in billions of dollars, the case of Coinbase Global, Inc. (NASDAQ: COIN) being a good example. Andrew Slimmon, an executive at Morgan Stanley, has warned of increased market volatility in the coming months.
Why Are Tech Stocks Soaring?
Some of the growth is pandemic-driven. For example, the shares of cloud service providers like Five9, Inc. (NASDAQ: FIVN) have surged on the back of increased work from home demand, and this has led to an increase in the demand for computer chips to maintain cloud data centres, driving the increase in share prices of semiconductor manufacturing companies like NVIDIA Corporation (NASDAQ: NVDA), and causing a shortage of chips that has increased the demand for raw material needed to make them, sending mining companies into overdrive.
There is plenty of reason to doubt the sustainability of this growth. At the end of 2020, as the news of the vaccine rollout in the United States picked up steam, more than $1.8 billion were invested in the iShares Russell 2000 ETF (NYSE: IWM) by traders who expected the economy to reopen quickly. In the next two days, as virus cases continued to rise, more than $1 billion of these investments were withdrawn as the realization dawned that it was going to be very tricky to predict what a reopened economy might look like post-pandemic.
There is a silver lining to all this confusion. For investors who want to take advantage of the tech boom, there are great opportunities for investing in undervalued tech stocks that have the potential to offer handsome returns. Instead of going into the post-pandemic world with uncertainty, there is plenty of value in betting on the growth of smaller technology firms who have a decent financial history. The case for investing in these undervalued firms is made stronger if one analyzes the performance of hedge funds over an extended period of time.
Paying attention to valuations has become necessary, especially in the current age of speculation and rumors. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context in mind, here are the top 10 undervalued tech stocks. Apart from taking into account the fundamentals and future growth catalysts, we chose the tech stocks with PE (TTM) ratio less than or equal to 15 and rising revenues as of 2020, compared to the previous year.
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Undervalued Tech Stocks
10. Methode Electronics, Inc. (NYSE: MEI)
Number of Hedge Fund Holders: 11
Methode Electronics, Inc. (NYSE: MEI) is an Illinois-based technology company involved in the design and manufacture of automotive, industrial, interface, and medical products. The firm markets electronic devices, power assemblies, interface solutions, and surface support technologies. It has operations on more than 35 locations in 14 different countries. The firm was founded in 1946 and has close to 5,000 employees working for it. Methode Electronics is placed tenth on our list of top 10 undervalued tech stocks.
The company has a market cap of $1.7 billion and posted an annual revenue of more than $1.01 billion in December 2020, slightly up from the 1 billion posted the year before. It has a price-to-earnings ratio of 13.76. In March, it declared a quarterly dividend of $0.11 per share. The same month, the company also authorized a $100 million share buyback program. Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Ariel Investments is a leading shareholder in the firm with shares worth more than $39 million.
9. SYNNEX Corporation (NYSE: SNX)
Number of Hedge Fund Holders: 24
SYNNEX Corporation (NYSE: SNX) is a California-based technology firm that provides business processing services in the United States and other countries. The company distributes information technology systems, software, communications and security equipment, as well as consumer electronics to business clients. The company was founded in 1980 and is placed ninth on our list of top 10 undervalued tech stocks. The company also provides cloud and financing services for different firms.
On April 19, the firm announced that it had entered into an agreement with Florida-based software firm Citrix Systems, Inc. (NASDAQ: CTXS) to distribute the digital workspace solutions offered by Citrix to SYNNEX clients. On April 15, SYNNEX had entered into an agreement with Sonim Technologies, Inc. (NASDAQ: SONM) to distribute Sonim electronics to clients. At the end of the fourth quarter of 2020, 24 hedge funds in the database of Insider Monkey held stakes worth $444 million in the firm, down from 27 in the preceding quarter worth $682 million.
In the Q3 2020 investor letter, Greenlight Capital highlighted a few stocks and Synnex Corp (NYSE:SNX) is one of them. Here is what Greenlight Capital said:
“Historically an IT hardware distributor, SNX began scaling a Business Process Outsourcing (BPO) division in 2014 through a series of acquisitions. Both business segments have attractive organic growth prospects, strong management and good reputations with customers. In January, SNX announced it would spin off the BPO business in the second half of the year. We believe the spin-off will create significant value for shareholders. While IT hardware distributors have low margins and trade at below market P/E multiples, established BPOs have higher margins and trade at premium P/E multiples. We believe the spin-off will reveal that the sum of the parts is worth more than the whole. We acquired our shares at an average entry price of $126.29, or just over 10x FY2021 consensus earnings per share. SNX shares ended the quarter at $140.06.”
8. Ebix, Inc. (NASDAQ: EBIX)
Number of Hedge Fund Holders: 14
Ebix, Inc. (NASDAQ: EBIX) is a Georgia-based company that provides software and e-commerce services to several industries. The firm markets software-based solutions for customer relationship management, front-end and back-end systems, and administrative tasks. It has operations in Australia, New Zealand, the United Kingdom, and the United States. The e-commerce services include travel exchanges and money transfer services, as well as foreign exchange and outward remittance services. The firm was founded in 1976.
Ebix is ranked eighth on our list of top 10 undervalued tech stocks. On March 9, the company announced that it had signed an agreement with SBI Capital Markets to lead a proposed initial public offering of EbixCash, an Indian subsidiary of Ebix. The share price of the company jumped more than 6% after the announcement. Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm P2 Capital Partners is a leading shareholder in the firm with more than 1 million shares worth more than $41 million.
7. HP Inc. (NYSE: HPQ)
Number of Hedge Fund Holders: 39
HP Inc. (NYSE: HPQ) is a California-based multinational technology firm that develops and sells personal computers, imaging and printing products, and other technologies. The products that the firm markets include printers, scanners, digital cameras, calculators, servers, workstation computers, as well as computers for home and small-business use. HP is often described as the leading printing systems provider in the world.
On March 26, investment firm Evercore maintained an Outperform rating on HP stock with a price target of $33. The shares of the firm jumped more than 3% after the announcement, Investment bank JP Morgan had also upgraded HP stock rating after a strong fiscal quarter report released in the previous month. Out of the hedge funds being tracked by Insider Monkey, Boston-based investment firm Arrowstreet Capital is a leading shareholder in the firm with 14.4 million shares worth more than $354 million.
6. Intel Corporation (NASDAQ: INTC)
Number of Hedge Fund Holders: 72
Intel Corporation (NASDAQ: INTC) is a Mountain View-based company that has stakes in the computer product, networking service, data storage equipment, and communications platform businesses. Intel is famous for designing and manufacturing semiconductor chips that are used in electronics all over the world. Amid a shortage of these chips due to increased demand post-pandemic, Intel has ramped up production and seen its share price rise.
In March, Intel revealed plans to build a semiconductor fabrication plant in Europe. It also announced investments worth $20 billion in two chip fabrication plants in the United States with the aim of becoming a leading manufacturer of the product globally. On April 21, the firm told the media that CEO Pat Gelsinger planned to travel to Europe to meet with EU officials regarding the new plant.
At the end of the fourth quarter of 2020, 72 hedge funds in the Insider Monkey database held stakes worth $5.5 billion in Intel, up from 66 in the previous quarter having shares worth $4.3 billion.
Alger Spectra Fund, in their Q1 2021 investor letter, mentioned Intel Corporation (NASDAQ: INTC). Here is what Alger Spectra Fund has to say about Intel Corporation in their Q1 2021 investor letter:
“Short exposure to Intel also detracted from performance. Intel designs and manufactures semiconductors for the computing and communications industries. Intel’s proprietary intellectual strength and manufacturing prowess versus the competition is deteriorating, which is causing the company to lose market share and profit opportunities. The short position detracted from portfolio returns as the share price reacted positively to the announcement of Pat Gelsinger being hired as chief executive officer, a stronger-than-anticipated quarterly earnings report driven by unusually robust PC sales that we believe are unsustainable and the unveiling of “Intel Unleashed,” a new long-term program to help improve manufacturing and spur innovation. This program involves opening two fabrication plants in Arizona, which confirms Intel’s commitment to continue as an integrated design manufacturer. Importantly, Intel continues to experience issues with its next generation server chips which are disadvantaging Intel versus the competition.”
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Disclosure: None. Top 10 Undervalued Tech Stocks is originally published on Insider Monkey.
