Value Tech Stocks Had A Solid 2021. Will The Rally Continue?

Our theme of Value Tech Stocks – which is comprised of tech stocks with a market cap of over $5 billion and a price to earnings multiple of under 20x – has rallied by a solid 57% year-to-date, considerably outperforming the S&P 500 index which is up by about 28% over the same period. The outperformance isn’t really surprising. We’ve been bullish on the theme since last year (see updates below) given that it plays on the increasing digitization of the economy following Covid-19 and higher corporate IT spending, without being weighed down by interest rate and inflation concerns, unlike other high-growth, high multiple-technology stocks. So will the outperformance continue? Although we expect these stocks to do better than the broader markets as the Fed has planned as many as three interest rate hikes for 2022, some of the Covid-19 related tailwinds that technology stocks, in general, saw in recent quarters could ease.

Within our theme, Arista Networks, a company that sells networking solutions for large datacenter, cloud computing, high-performance computing applications, has been the strongest performer with its stock price up by almost 100% over the last twelve months. On the other side, Lumentum Holdings, a company that manufactures optical and photonic products, has been a relative laggard in the theme, with its stock rising by just about 13% year-to-date.

Below you’ll find our previous coverage of the value tech stocks theme where you can track our view over time.

[7/21/2021] Amkor, eBay: Value Tech Stocks Offer The Best Of Both Worlds

Our theme of Value Tech Stocks – which is comprised of tech stocks with a market cap of over $5 billion and a price to earnings multiple of under 20x – has rallied by about 19% year-to-date, outperforming the S&P 500 index which is up by about 15% over the same period. We see this outperformance continuing in the coming quarters as well, as the stocks in the theme stand to benefit from increasing digitization of the economy following Covid-19 and higher corporate IT spending, without being weighed down by potentially higher interest rates and inflation concerns, unlike other high-growth, high multiple-tech stocks.

Within our theme, Amkor Technology, a company that provides semiconductor product packaging and test services, has been the strongest performer, rising by about 48% year-to-date. The rally is being driven by strong demand for semiconductor products and recent speculation of a takeover bid by a private equity player. eBay stock has also fared quite well, rising by around 38%, driven by a higher interest in e-commerce through the pandemic. On the other side, video game maker Electronic Arts has been the weakest performer, with its stock down by about 2% year-to-date.

[6/3/21] Value Tech Stocks Are Back In Favor

Our theme of Value Tech Stocks is up by about 16% year-to-date, significantly outperforming the Nasdaq-100 index which is just about 8% higher over the same period. The theme is comprised of large-cap technology stocks that trade at a trailing price to earnings multiple of under 20x. We think the outperformance is likely to continue for a couple of reasons. Firstly, inflation has been trending higher globally and this could cause Central banks to re-think their stance on ultra-low interest rates. This should cause investors to continue rotating out of growth stocks into value stocks. Moreover, most of the companies in our theme are mature tech names and should remain a play on increasing digitization of the economy following Covid-19.

Cybersecurity player NortonLifeLock has been the strongest performer within our theme, with its stock up by about 37% year-to-date, driven by better than expected Q4 2021 results, which were driven by higher demand for the company’s software, following high-profile cyber attacks in recent quarters. The company also recently announced plans to carry out a $1.5 billion share repurchase program. eBay stock has also fared quite well, rising by around 26%, driven by higher interest in e-commerce through the pandemic. On the other hand, video game maker Electronic Arts has been the weakest performer, with its stock down by about 1.5% year-to-date.

[5/5/21] Which Value Tech Stock Should You Pick?

Our theme of Value Tech Stocks is up by about 10% year-to-date, compared to the Nasdaq-100 which is up by just about 5% over the same period. The theme includes stocks from the tech sector that have a market cap of over $10 billion, trading at a trailing price to earnings multiple of under 20x. With Covid-19 cases well off their highs in the U.S. and about a third of the U.S. population now fully vaccinated, investors are moving away from high growth stocks and Covid-19 winners toward cyclical and value stocks. Moreover, Treasury Secretary Janet Yellen says that interest rates may have to rise somewhat to keep the economy from overheating and this is another factor that could help value names. We think that value technology stocks, in particular, look attractive at this juncture, considering that they also play on the broader theme of digitization and higher corporate IT budgets post the pandemic. Below is a bit more about how the stocks in our theme have been faring.

Intel stock has been one of the strongest performers within our theme, rising by about 17% year-to-date, driven by strong semiconductor demand, large new investment plans in the foundry space, and some changes at the top management level. Cisco stock is up by about 14% year-to-date, as enterprises are likely to increase spending on network infrastructure post the pandemic, with overall corporate IT budgets also likely to trend higher. eBay stock (NASDAQ: EBAY) is also up 14% year-to-date, as the company sees some tailwinds from the shift to e-commerce through Covid-19. However, the stock has come under pressure lately due to lighter than expected guidance for the current quarter. Electronic Arts has been the worst performer within our theme, with its stock declining by -3.5% year-to-date.

[3/8/21] Will Rising Bond Yields Help Value Tech Stocks?

Our theme of Value Tech Stocks includes technology names with a market cap of over $10 billion that are trading at a trailing P/E of under 20x. Although the theme has underperformed since 2017, rising by just about 31%, compared to the Nasdaq-100, which has more than doubled over the period, it has fared better this year, rising 1.5% year-to-date compared to the Nasdaq-100 which is down by over 4%. There’s a good chance these stocks could continue to outperform in 2021, as rising bond yields take some sheen off higher growth names with investors potentially rotating into value stocks. For perspective, the 10-year Treasury yield has risen from around 1.1% to 1.6% in just about a month. Now, value tech stocks might hit the sweet spot in this market as they trade at reasonable valuations while playing on the broader Covid-19 theme of greater digitization and higher corporate IT spends. Moreover, most of the names in our theme are mature tech companies that are incumbents in their respective segments. Within our theme, Intel stock has been the strongest performer, rising by about 20% year-to-date driven by strong semiconductor demand and some top management changes. On the other side, Marvell (NASDAQ: MRVL) a company that develops and produces semiconductors and related technology has underperformed on account of mixed quarterly earnings, with its stock declining by about 13% year-to-date.

[2/22/2021] Will Tech’s Old Guard Beat The Market In 2021?

Our theme of Value Tech Stocks has underperformed the market in recent years, rising by just about 29% since the end of 2017, compared to the S&P 500 which is up by about 46% over the same period. The theme includes tech companies that offer essential technology products and services, have a market capitalization of over $10 billion, and trade at a trailing price to earnings multiple of under 20x. In comparison, the broader NASDAQ index trades at a much higher 40x trailing P/E. However, we believe that the stocks in our theme have lower price risk in the current market environment, and at the same time could offer reasonable upside from increasing digitization and higher corporate IT spends following Covid-19. Below is a bit more about the stocks in the theme and some trends that could help to drive them higher in the near-term.

Intel stock stock has been the best performer within our theme this year so far, rising by about 26% since early January, driven by stronger than expected Q4 results and guidance for the current quarter, and also due to the appointment of new CEO Pat Gelsinger. Moreover, demand for semiconductors has been strong across the board, with many end-markets facing chip shortages. Intel, with its sizable production capacity, should stand to gain.

Cisco stock is up by about 2% year-to-date. The company has been witnessing weaker demand for its networking gear as the Covid-19 pandemic caused customers to postpone deployments and also due to stronger competition. However, IT spending is expected to rebound sharply as the pandemic wanes and Cisco should be well poised to benefit. Additionally, Cisco’s pivot to a more software-centric model should also help the stock.

Oracle stock stock is down by about -5.5% year-to-date. Although revenues have faced pressure in recent years as the hardware and services segments have taken a hit, the company’s cloud operations, particularly its public cloud business, could unlock a lot of value. During its most recent quarter, the company said that revenue from its Gen 2 cloud was up over 100% year-over-year. As the public cloud business continues to gain scale and the company provides more transparency, investors could potentially re-rate the stock higher.

[Updated 1/20/2021] Value Tech Stocks

Our indicative theme of Value Tech Stocks includes relatively mature businesses that offer essential technology products and services and trade at reasonable valuations. Specifically, we have picked tech companies that are trading at a trailing price to earnings multiple of under 20x and have a market capitalization of over $10 billion. Although these stocks haven’t really rallied since our last update in November, with the Covid-19 vaccines roll out gathering steam globally, it’s likely only a matter of time before broader economic growth returns, helping value stocks, including reasonably priced technology names. Here’s a quick rundown of some value stocks in our Value tech stocks theme.

Intel has been out of favor with investors due to increasing preference for lower-cost ARM-based chipsets and a delay in its rollout of its next-generation 7nm CPUs. However, the stock is up by about 16% year-to-date, as investors have a favorable view of Intel’s recently announced top management shakeup, which will see VMware CEO and former Intel CTO Pat Gelsinger succeed current Intel CEO, Bob Swan.

Cisco stock has also been listless as corporations paired back on spending on networking gear through the Covid-19 recession. However, IT spending is likely to rebound sharply over 2021 and Cisco being the go-to company for enterprise networking solutions should benefit. The company’s gradual pivoting to a more software-driven model should also help the stock. The stock is up by about 1.5% this year.

Oracle is a provider of database, cloud, and enterprise software products. The stock has seen steady growth over the last several years, driven by expanding earnings and its share repurchase program. The company has been expanding sales of its cloud-based applications, such as Fusion and enterprise resourcing planning services, helping to offset the slow growth of its legacy offerings. The stock is down by about -4.5% this year.

NetApp is a company that sells hardware and software focused on data management. While the company has seen a mixed performance in recent quarters, due to weak demand from large customers and its significant reliance on hardware sales, its increasing focus on the cloud computing market should help the stock. The stock is down 2.5% year to date.

[ Updated 11/24/2020] Is it A Good Time To Double Down On Value Tech Stocks?

Value Tech Stocks such as Oracle and Intel have had a mixed year. There was good reason for this, as the deep Covid-19 recession, abundant liquidity following interest rate cuts, and the growing at-home economy drove investors to hyper-growth software as service stocks, high-risk, high reward sectors such as electric vehicles, and fast-growing platform players such as Facebook and Amazon.

However, with the availability of multiple highly effective Covid-19 vaccines (Pfizer, Moderna, and AstraZeneca have published strong efficacy data on their vaccines) looking likely in 2021, things are likely to gradually start returning to normal. Moreover, the Fed could also eventually revisit its stance on ultra-low interest rates as the economy shows signs of picking up. As this plays out investors could re-visit lower growth stocks that represent compelling value. While positive news about the vaccine earlier this month has already buoyed cyclical sectors such as energy, industrials, and financials we think it’s likely that funds will flow to value tech stocks in the near-to-medium term.

Our indicative theme of Value Tech Stocks includes relatively mature businesses that offer essential technology products and services and trade at reasonable valuations. Specifically, we have picked companies that are trading at a trailing price to earnings multiple of under 18x and have a market capitalization of over $10 billion. Key names in the theme include Oracle , VMware Inc, Seagate Technology, Cisco, and Intel.

[Updated 11/10/2020] Can Intel Stock Recover?

Intel stock has had a rough year, driven by delays in the company’s transition to the next generation 7-nano meter technology for its chips, some recent headwinds at its cloud and data center business, and strong competition from rival AMD in the PC and server CPU space. The stock is down by about 25% this year, significantly underperforming the NASDAQ which is up by over 28%. That said, there have been some positive developments that could help the company get back on track. In October, Intel announced a deal to sell its NAND business to SK Hynix for about $9 billion in a move that could allow the company to focus on its core CPU business, while bolstering its liquidity. Intel also appears to be more flexible with its manufacturing, recently noting that it could produce its next-gen chips in-house, or outsource them, or even use a hybrid model that leverages both internal and external fabs. Intel stock looks like good value at the moment, trading at just about 9.5x projected 2020 earnings. While growth could remain tepid in the near-term, Intel’s scale, its vast marketing and distribution footprint, and its large base of corporate customers, who rely on Intel processors and are likely averse to switching, should help the company in the medium to long-term.

See our indicative theme on Value Tech Stocks for a complete list of technology companies – including Intel, NetApp, and Oracle – that look like good value at the moment. The theme has underperformed this year, remaining roughly flat year-to-date, versus the S&P 500 which is up by about 10%.

[Updated 9/3/2020] Value Tech Stocks

While high-growth information technology stocks have rallied sharply this year, with valuations looking increasingly stretched, we’ve picked a few stocks including Intel, Cisco, and NetApp that have relatively stable and mature businesses and still offer good value. Specifically, we have picked companies that are trading at a trailing price to earnings multiple of under 18x and have a market capitalization of over $10 billion. See our analysis Value Tech Stocks for more details on the returns and performance of these stocks. Parts of the analysis are summarized below.

Intel ($215 billion market cap, -15% YTD), the largest CPU vendor has been somewhat out of favor with investors on account of increasing competition from lower-cost ARM-based chipsets and the company’s delay in its rollout of its next-generation 7nm CPUs. However, Intel looks like good value considering its large base of existing customers, who rely on Intel processors and are likely averse to switch and also due to its vast marketing and distribution footprint. The stock trades at about 11x 2019 earnings.

Cisco ($178 billion market cap, -10% YTD), one of the largest network equipment providers, has also underperformed the market as it has struggled with top-line and bottom-line growth. However, the increasing digitization caused by the Covid-19 pandemic could drive demand for connectivity, in turn improving sales of Cisco’s networking software, and products such as switches and routers. The stock trades at about 16x FY’19 earnings.

NetApp ($10 billion market cap, -25% YTD) is a company that sells hardware and software focused on data management. While the company has seen a mixed performance this year due to weak demand from large customers and its significant reliance on hardware sales, it is looking to double down on the cloud computing market. Last month, NetApp closed a deal to acquire Spot, a leader in computing management, and cost optimization for public clouds. The stock currently trades at about 13x last fiscal year earnings.

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