Hallelujah! Christmas has come early for Wall Street. Stock indices are reaching for the stars. But the conservative investor community is scared. Markets are abuzz that we may be approaching a tech bubble. Finding undervalued tech stocks in 2017 could be a tough row to hoe.
I know that many of us are stuck between the devil and the deep blue sea. For us—traditional investors—it is a serious dilemma. On one hand are low bond yields, on the other are overheated stock markets.
If we put our money in bonds, we get a guaranteed stream of income but the return is too low. If we buy stocks, there is the likelihood of overpaying against an added risk.
So where do we go?
Put your investor hats on and follow me!
The secret to making a big fortune lies in identifying the right investments at the right time.
By “right investments,” I mean companies with a durable economic moat that can be expected to stay around for at least 10 years down the road. By “right time,” I mean investing in companies when they are undervalued.
If your timing is wrong, no matter how promising the company fundamentals are, you’ll be buying high and selling low. Remember, billionaire investors made money because their timing was right. They bought low and sold high.
You don’t have to be a well-versed financial analyst to be able to crunch numbers in order to find these undervalued investments.
Let me give you a basic rule of thumb, minus all the number crunching.
How to Value Stocks?
Imagine yourself as one of the billionaire investors—Buffett, Soros, Thiel, or whoever you like. Welcome to your dream world! You now have a gigantic stash of money to spend.
Let’s go shopping!
You are in a position to buy virtually any company in this world. How do you decide which one to buy?
Suppose there is a company X with a market capitalization of $400.0 billion and making roughly $10.0 billion in annual earnings. If you buy all of its outstanding shares, the annual return on your investment will be 2.5% ($10.00/$400.00).
Please note that going forward, we’re going to use the most recent earnings figure and not an average of past years. This is because unlike traditional industries, tech is a high growth industry. So an average will shrink our earnings numbers and not reflect a true picture.
Now, compare your return to the current Treasury bond yield of 2.4%. On one hand, you can get a guaranteed 2.4% return. On the other hand, you are taking the risk of fluctuating earnings for only 0.1% in extra return. Which investment option would you pick?
This hypothetical company is actually Facebook Inc (NASDAQ:FB). Despite the fact that Facebook has solid fundamentals and a promising future, it’s a bitter reality that at current price levels, the stock may not be cheap.
This is exactly the dilemma that the average investor is facing right now—lots of promising tech companies but inflated stock prices.
With bond yields so low, one might think stocks are the more viable investment options with higher returns. But just like our example shows, that’s not always the case.
Of course, the average investor who is inherently risk averse will prefer the bond investment here.
If you understand this far, the rest is easy. Just remember; if you, as a billionaire, find a company to be overvalued compared to a bond investment, you wouldn’t want to buy even a single share in it. This is because that money can be put into bonds to earn a steady coupon income.
Use that analogy and grab a calculator. It’s time to do some basic math. Stock valuation doesn’t get any easier than this.
Most Undervalued Tech Stocks 2017
We are witnesses of the fourth industrial revolution—dubbed the age of technology. But, while there are a plethora of tech companies out there, only a few are profitable.
Why, you ask? Because the technology sector has peculiar dynamics.
The business landscape for tech companies is evolving at supersonic speed. To keep up, they have to innovate. And for innovation, they need to spend hefty sums on research and development (R&D).
Yes, R&D is that infamous expense figure on an income statement that turns even the most glorious of top lines into miserable bottom lines.
This is exactly why traditional investors swerve past tech investments every time they approach this sector.
But this attitude is now changing. Today, even the great Warren Buffett wants a slice of this fattening pie. And why not? Tech is the future.
But beware! Not all tech companies will be there in the future. This is why we want to pick the ones that have already established their profitability and hold a promising future.
Here are three of what appear to be the most undervalued tech stocks of 2017.
|Stock||Market Cap||Most Recent Earnings||Return (Current Year)|
|Ambarella Stock (NASDAQ: AMBA)||$1.8 Billion||$76.5 Million||4.25%|
|Texas Instruments Stock (NASDAQ: TXN)||$80.6 Billion||$3.6 Billion||4.5%|
|Apple Stock (NASDAQ: AAPL)||$742 Billion||$45.7 Billion||6.15%|
1. Ambarella Stock (NASDAQ: AMBA)
First up is the semiconductor chip maker famous for its drone and action camera chips—Ambarella Inc (NASDAQ:AMBA).
This is the age of live-streaming videos. The trend is spreading like wildfire—be it Facebook, Instagram, SnapChat, Twitter or YouTube, everyone wants to click, record, and share. So where does Ambarella fall in all this?
Ambarella’s high-definition camera chips are powering everything from action headgear to flying drones.
And that’s not all. Ambarella’s camera chip portfolio also has an automotive segment. Heck, even I own an Ambarella-powered dash cam. And I have to say, the quality of its processor is supreme.
Ambarella’s moat is strong. The company is celebrated for its quality.
Sadly, Ambarella went through a rough patch last year for having its name associated with GoPro Inc (NASDAQ:GPRO). Yes, customer GoPro’s problems have been real, but subsequent concerns on supplier Amabrella were unfounded.
You can confirm this from Ambarella’s growing profit figures. Amabrella has been selling, even when GoPro wasn’t.
Now that you’ve an idea of the company, let’s revisit our valuation method and see if AMBA stock is undervalued.
With a market cap of $1.8 billion and latest earnings of $76.5 million (which, by the way, are growing exponentially) AMBA stock could have made you over 4.25% in annual returns this year. This is nearly double the current bond yields!
2. Texas Instruments Stock (NASDAQ: TXN)
This is a tech company AND it pays dividends! Now that’s a rare gem!
Texas Instruments Incorporated (NASDAQ:TXN) is a semiconductor company known for its processors, batteries, and touch screen controllers that are powering many of our gadgets. In fact, tech giants like Apple Inc. (NASDAQ:AAPL), Alphabet Inc owned Google (NASDAQ:GOOGL), and Lenovo buy chips from Texas Instruments to power their own devices.
By the way, if you’re holding your financial calculator right now, you might as well check the manufacturer’s name. It is more than likely that it says Texas Instruments.
However, the most promising reason why I love this company has to be its automotive solutions segment. Our cars are getting smarter with self-driving technology now making it to the mainstream. It is evident that automotive processors will see a boost in demand. Rest assured that Texas Instruments will see many automakers knocking at its doors.
The company’s expanding earnings are a testament to the growing demand for its chips.
Let’s see if this tech stock is undervalued according to our valuation.
TI has a market cap of $80.6 billion and the latest reported earnings of $3.6 billion. This translates into a return of nearly 4.5%. Again, a much better prospect than holding Treasury bonds.
3. Apple Stock (NASDAQ: AAPL)
There could be no investment more valuable than one in the most profitable company in the world. The naysayers may tell you otherwise, but it’s time you tune out that noise. Apple Inc. (NASDAQ:AAPL) stock is still cheap and here’s our litmus test to prove it.
Apple’s recent earnings of $45.7 billion against a market cap of roughly $742.0 billion deliver a solid 6.15% return. Now that’s one investment I wouldn’t want to pass on. Need I say more?
Bottom Line on Most Undervalued Tech Stocks 2017
Just remember; these could be the right investments, but you must also seek the right time. Seasoned investors like Buffett are known to have bought through market corrections and recessions. But if neither is happening anytime soon, how do you make your timing right?
Let me give you a hint.
Sometimes insignificant bad news can create an opportunity. When Mr. Market anticipates a storm on the horizon, he doesn’t think twice to jump ship. That’s when a disciplined investor hops on to grab his seat because he knows the dark clouds will clear tomorrow.
It doesn’t take one to be a genius to see that all three of these tech stocks can deliver better returns than a boring bond investment.
Two of these companies—Apple and Texas Instruments—have been around for over three decades, pay dividends, and have solid profitability numbers. Ambarella may be late to the party, but the night is still young.
All in all, these could be the best undervalued tech stocks right now.