The tech sector isn’t exactly known for value opportunities, as many of the most high-profile tech stocks trade at premium valuations.
But not all of them do — in fact, within the technology hardware world, there are many cheap-looking stocks based on solid fundamentals. Given that these same hardware stocks are getting a big boost from the artificial-intelligence buildout, the hardware sub-sector is rife with bargain-priced stocks with strong growth prospects, such as the following three names.
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Applied Materials
Semiconductor equipment leader Applied Materials (NASDAQ: AMAT) sold off after its recent earnings report, but it probably wasn’t due to actual results and guidance, which came in ahead of analyst estimates. Rather, the sell-off can probably be attributed to a Reuters story that came out around the same time, which said Applied is under criminal investigation by the Justice Department for sending equipment to China without a license.
Of course, the Reuters report wasn’t new news, so it’s curious, to say the least, why that came out in conjunction with earnings. In fact, Applied had disclosed in its last annual report a year ago that it had been subpoenaed by the Justice Department for sales to China.
While the uncertainty around the case remains an open, investors may wish to look at the stock’s decline as an opportunity.
Applied has the most diverse portfolio of semiconductor equipment in the industry and stands poised to benefit from several inflections in artificial-intelligence chips. These include a new transistor architecture set to ramp in 2024 and 2025 called gate-all-around (GAA), in which the transistor is surrounded by the gate on all four sides. Another innovation coming next year is backside power, whereby a semiconductor’s power is routed to the back of the chip, freeing up more space for more transistors on the front. Meanwhile, Applied also has important equipment for advanced packaging, which will also be a key growth market for “chiplet” architectures we’re seeing in new accelerators such as the MI300. And the company’s strength in trailing nodes should continue as electrification trends progress.
The past year has been a down year for the chip industry overall, in which memory and leading-edge logic spending went into their worst downturn in years. Despite that, Applied still grew revenue 3%, and grew adjusted (non-GAAP) earnings per share by 5%. Applied also generated $7.6 billion in free cash flow, allowing for a rising dividend and ample share repurchases.
Following the stock’s drop after the Reuters story, Applied trades at just 18 times earnings following its post-earnings drop, and 16.2 times fee cash flow. That seems too cheap for a market leader benefiting from several AI-related inflections.
Dell Technologies
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Dell Technologies (NYSE: DELL) is another tech stalwart set to benefit from AI. You’re probably familiar with Dell as a maker of PCs, but it also has just as large of an enterprise server business. In fact, while Dell’s PC business is larger by revenue, its server and storage business generates more operating income — although the two segments are close to even.
Dell’s servers tend to be high-end machines that companies use in their on-premise data centers, and Dell is parlaying that premium status into new artificial intelligence products. Dell just recently partnered with AI chip leader Nvidia on the Dell Validated Design for Generative AI with Nvidia, which is an optimized hardware platform for inferencing. Inferencing is when an AI reacts to a query or stimulus with an answer based on trained models. Meanwhile, management recently noted that its AI-optimized PowerEdge generative AI servers have been Dell’s fastest-ramping product in its history.
The server market is coming off of a down year as the post-pandemic decline in cloud and enterprise spending caused Dell’s server and storage revenues to decline by 11%. However, Dell’s server and storage revenue increased 11% relative to the prior quarter, suggesting the industry is bottoming out and coming out of its slump. And there are signs of a PC recovery too, with PC revenue down 16% year over year but up 8% sequentially.
With a 2% dividend and trading at just 11 times next year’s earnings estimates, Dell is another low-priced stock for tech investors.
Kulicke & Soffa
One of the key parts of the AI revolution is the advanced packaging industry. Not only do AI systems need to tightly incorporate AI accelerators with high-bandwidth memory in intricate packages, but even chips themselves are now being broken up into “chiplets,” tied together with advanced packaging, in order to make superchips that one die alone couldn’t produce.
All of that should benefit Kulicke & Soffa (NASDAQ: KLIC), a leader in electronics packaging. While KLIC is known for its traditional wire bonder solutions for traditional electronics packaging, the company also has a growing thermocompression bonding (TCB) portfolio for advanced packaging solutions needed by AI chips.
While these advanced machines currently make up a small portion of revenue, they are growing fast. In conjunction with its recent earnings release, Kulicke & Soffa management announced a large order for thermocompression tools by a customer in high-bandwidth silicon photonics for artificial intelligence networking applications. Moreover, the company said it was now supply constrained in these advanced packaging tools. In its recently concluded fiscal year ended in September, KLIC management noted that these new TCB tools garnered $64 million in revenue, relative to single-digit millions in 2020. By 2025, management expects to get over $100 million in revenue from these advanced tools.
Meanwhile, it appears that like other chip companies, Kulicke is seeing its core end markets bottom and start to turn up. The highly cyclical company saw revenue fall in half, and EPS plunge from $7.09 during the boom year of 2022 to just $0.99 in the bust year of 2023. But the core ball conder market saw 50% sequential growth in the last quarter, signaling the next upturn is upon us.
Even amid the last year’s earnings decline, KLIC’s stock is cheap enough to be a buy, even with that cyclicality. The company trades at $50 per share, but it also has $13.45 of cash on its balance sheet and no debt. So the company’s enterprise value per share is closer to $37. And if you take the average of the last two years — one boom, one bust — KILC earned on average $4 per share.
With new products in advanced packaging, advanced displays, and auto battery packaging, the company should eventually make higher cyclical highs and lows over time, making its stock look very cheap today.
