3 Cheap Tech Stocks to Buy Right Now

Many tech stocks soared over the past year as interest rates stabilized and investors eagerly rushed toward AI-related stocks in anticipation of a major AI boom. However, that buying frenzy also inflated some tech stocks’ valuations to historical highs.

So for investors who are wary of buying the market’s priciest tech stocks, it might be a good idea to look for the cheaper value plays that pay steady dividends instead. I believe three underappreciated blue chip stocks fit the bill: IBM (IBM -0.28%), AT&T (T 0.68%), and Cisco (CSCO -0.27%).

A retired couple discusses their portfolio with a financial advisor.

Image source: Getty Images.

1. IBM

For years, IBM was considered dead money. From the first trading day of 2011 to 2021, the tech giant’s stock declined 16% as the S&P 500 rallied 191%. It underperformed the market by such a wide margin because it struggled to grow its revenue and keep pace with the evolving cloud market. It divested some of its lower-margin businesses to generate fresh cash, but it repeatedly plowed most of that cash into wasteful buybacks instead of improving its core businesses.

But over the past three years, IBM’s stock rallied 56% as its CEO Arvind Krishna — who took the helm in 2020 — executed an aggressive turnaround plan. It divested its slow-growth managed infrastructure services unit as Kyndryl, restructured its remaining businesses into three simpler units (software, consulting, and infrastructure), and expanded its higher-growth hybrid cloud and AI businesses with a goal of generating mid-single digit revenue growth again.

That strategy required IBM to expand Red Hat, which it acquired in 2019, with more open source software that could process the data between private and public clouds. That niche approach expanded its cloud ecosystem without going head-to-head against public cloud leaders like Amazon and Microsoft.

As a result, IBM’s revenue grew 6% in 2022 and 2% in 2023, and analysts expect its revenue and adjusted EPS to rise 3% and 5%, respectively, in 2024. Those growth rates indicate that Big Blue’s business is finally stabilizing — but it still looks like a bargain at 18 times forward earnings, and it pays a high forward yield of 3.6%.

2. AT&T

Like IBM, AT&T was once considered a dismal long-term investment. But in 2021 and 2022, it divested DirecTV and Time Warner and abandoned its ill-fated attempt to become a media superpower. After it streamlined its business, it focused on strengthening its core telecom business by upgrading its 5G and fiber networks.

That turnaround effort paid off. Its total number of wireless postpaid subscribers grew by 2.9 million in 2022 and 1.7 million in 2023, while the expansion of its fiber business offset the slower growth of its non-fiber broadband businesses. Its revenue rose 2% in 2022 (excluding the divestment of its U.S. video business) and grew 1% in 2023.

Analysts expect its revenue to rise 1% in 2024 and 2025. Those growth rates might seem anemic, but they indicate AT&T is becoming a stable blue chip investment again.

Meanwhile, AT&T’s free cash flow (FCF) rose from $14.1 billion in 2022 to $16.8 billion in 2023, and it expects that figure to rise to $17-$18 billion in 2024. That healthy FCF growth should easily support its hefty forward dividend yield of 6.6%. Analysts expect its adjusted EPS to dip 8% in 2024 as it upgrades its networks, but they also anticipate 4% growth in 2025 as it laps those higher expenses. At seven times forward earnings, AT&T looks dirt cheap relative to those stable growth rates.

3. Cisco

Cisco, the world’s largest networking company, is often considered a safe blue-chip tech stock to hold through economic downturns. But over the past 12 months, its stock only rose 6% as investors fretted over its near-term slowdown.

Cisco’s revenue only rose 3% in fiscal 2022 (which ended in July 2022) as its networking hardware business grappled with supply chain constraints. In fiscal 2023, its revenue jumped 11% as it overcame those constraints and finally satisfied the market’s pent-up demand for new networking devices.

But for fiscal 2024, Cisco expects its revenue to dip 4%-6% with nearly flat EPS growth. That slowdown was caused by declining orders across the enterprise, service provider, and cloud markets. Many of those customers had overcompensated for the aforementioned supply chain constraints by ordering too much hardware in fiscal 2023, and they were now sitting on up to half a year of shipped orders that were still waiting to be deployed.

That situation might seem bleak, but Cisco has weathered plenty of cyclical downturns and supply gluts before. Analysts expect its revenue and adjusted EPS to rise again in fiscal 2025, and its stock still looks cheap at 13 times forward earnings with a forward yield of 3.1%. That low valuation and high yield could make it a good safe haven play in a choppy market.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in AT&T and Amazon. The Motley Fool has positions in and recommends Amazon, Cisco Systems, and Microsoft. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

Source link

About The Author

Scroll to Top