7 Cheap Tech Stocks to Buy Before the Next Breakout

Cheap is a relative term, but for those on the lookout for cheap tech stocks, 2022’s bear market has certainly made things easier. The Nasdaq is down 28.2% year to date, significantly outpacing the 14.6% decline in the broader S&P 500. A tech-led downturn is not unusual, though. And, of course, neither is a tech-led rebound.

If the Federal Reserve slows the pace of its interest rate increases by hiking rates 50 basis points later this month, a short-term breakout could ensue. More sustained upside in the tech sector should result from an improving economy once inflation has been tamed and the Fed starts lowering rates.

But investors with a mid-to-long-term perspective do not need to wait for that to happen to start building positions in cheap tech stocks. Below are seven that are attractively priced and likely t0 appreciate.

Cheap Tech Stocks: Alphabet (GOOGL)

Alphabet (NASDAQ:GOOGL) has been hit by the broader tech wreck and concerns about slowing ad revenue amid an economic downturn. Shares are down 31% year to date.

While the company’s third-quarter earnings disappointed the Street, Alphabet still managed to grow revenue by 6% year over year to $69.1 billion. And Google cloud revenue came in slightly better than expected at $6.87 billion. However, higher costs resulted in lower earnings and margins.

Despite economic headwinds weighing on ad sales, Alphabet will continue to dominate search advertising while strategically bolstering its cloud position. It is also likely to start heeding calls to reduce costs and staff, as well as offload underperforming bets like its self-driving car venture Waymo. If the company takes these steps, it will emerge leaner and stronger.

Alphabet’s massive search and ad revenue moats make it an excellent stock to buy whenever it’s on sale. And I’d say shedding nearly a third of its value this year qualifies it as being on sale.

Microsoft (MSFT)

This bear market is also providing investors with a rare chance to buy Microsoft (NASDAQ:MSFT) on sale, with shares down more than 25% this year. Yet, a rebound may already be underway. In just over a month, MSFT has rallied 17%.

The stock sold off sharply in late October following the release of the company’s fiscal first-quarter earnings. Despite reporting better-than-expected revenue and earnings, guidance disappointed. While growth concerns have weighed on the stock, investors can’t continue to expect pandemic-level growth from tech firms.

Microsoft’s fiscal Q1 revenue rose 11% year over year and 16% on a constant-currency basis to $50.1 billion. That’s nothing to sneer at. Meanwhile, the company’s three-year revenue growth rate of 17.4% is better than nearly 73% of its peers. Additionally, the company’s cloud services segment is growing at an impressive clip, up 20% in the most recent quarter compared with a year ago and surpassing 50% of the company’s total revenue for the first time.

Analysts are clearly bullish on the stock. Of the 53 who cover it, 48 rate it a “buy” or “overweight,” with four “holds” and just one “sell” rating. Analysts’ average target price of $293.06 implies 17% upside over the next 12 months. In the long term, shares should go much higher.

Cheap Tech Stocks: Applied Materials (AMAT)

Semiconductor stocks have been among the hardest hit over the past year and Applied Materials (NASDAQ:AMAT) is no exception. Shares of the semiconductor manufacturing equipment maker are down 32% year to date and look cheap from a historical perspective.

This is true despite shares rallying 16% in the past month alone, in part boosted by the company reporting better-than-expected results for its fiscal fourth quarter and issuing upbeat guidance for the current quarter. This included record quarterly revenue of $6.75 billion, up 10% from a year ago. The company also reported record annual revenue of $25.79 billion, up 12%, despite the numerous headwinds facing the sector this year.

While the company has warned that U.S. restrictions on chip exports to China could result in missed forecasts, management is generally upbeat. Looking ahead, Applied Materials should be a beneficiary of the CHIPS and Science Act.

As I said, shares have been on the upswing but remain cheap. Specifically, AMAT’s P/E ratio of 14.3 is below its 10-year median P/E of 18.2. As an added bonus, this is one of the cheap tech stocks that pays a dividend, throwing off a yield of 1%.

ON Semiconductor (ON)

ON Semiconductor (NASDAQ:ON) is an anomaly in that it is one tech stock that is actually up for the year, gaining 5.4% so far in 2o22. This strong performance has come on the back of four straight quarters of earnings beats for the maker of chips for the automotive, communications, computing, consumer, industrial, lighting, medical and military markets.

Given this, and the stock’s 20%-plus run in a little more than a month, you might be wondering how ON finds itself on a list of cheap tech stocks. While the stock looks modestly overvalued compared with its peers, it is undervalued when compared to its historical valuation. Shares currently trade with a P/E of 18.5 compared with a median of 23.7 over the past 10 years.

What’s more, it’s difficult to find much fault in company fundamentals, suggesting the stock deserves a premium valuation. For the third quarter, ON Semiconductor saw revenue increase 26% year over year to $2.19 billion, while non-GAAP earnings jumped 87% year over year to $1.45 per share. Both numbers came in above analysts’ estimates.

I expect ON stock to continue to outperform as it supplies chips for rapidly growing sectors with clear, sustained demand.

Cheap Tech Stocks: ASML (ASML)

ASML (NASDAQ:ASML) represents one of the most profitable and important semiconductor firms in existence. It is one of the few companies that produces lithography systems used to print semiconductors at scale.

A lithography system is basically a projection system used to etch blueprints onto chips. These systems are expensive due to their size and complexity. Per Reuters, each machine is as big as a bus and costs around $150 million to purchase. In the past two quarters, ASML has sold 163 of these systems.

In addition to producing machines that are vital to the semiconductor industry, ASML’s profitability metrics make it a can’t-miss stock. Its return on equity of 58.9% and return on assets of 17.8% rank better than 90% and 88% of its peers, respectively.

Shares are down around 25% year to date. However, over the past month, ASML has shot up 28%. Analysts’ average target price of $708.60 sits 18% above the current share price.

Block (SQ)

Block (NYSE:SQ) is a fintech that has suffered a 62% decline so far this year despite carving out a dominant position in the space. Formerly known as Square, the company’s digital payments platform grew rapidly during the 2010s. Last year, CEO Jack Dorsey changed the company’s name to Block to better reflect its future business, which includes an integrated system that spans e-commerce, banking, blockchain and cryptocurrency.

Block’s recent financials show the company is on solid footing. For Q3, revenue jumped 17% from a year ago to $4.52 billion. Meanwhile, gross profits increased 38% to $1.57 billion. Block’s CashApp and Square business segments contributed the bulk of those profits, rising 51% and 29% year over year, respectively.

SQ stock could see a short-term surge following the Fed’s Dec. 13-14 meeting if central bankers decide to only raise rates 50 basis points. Over the next 12 months, analysts see the stock moving upto $88.13, on average, implying upside of nearly 40%.

Cheap Tech Stocks: NCR Corporation (NCR)

NCR Corporation (NYSE:NCR) is another fintech. It provides software solutions, including point-of-sale systems, predominately to the restaurant and hospitality industries. Shares have struggled this year, down 42%, amid concerns of a slowing economy. However, since reporting third-quarter results on Oct. 25, shares are up 14%.

Q3 revenue increased by 4% year over year and 8% on a constant-currency basis to $1.97 billion. Adjusted EBITDA reached $380 million, up 8% year over year and 15% on a constant-currency basis.

The company is moving forward with a restructuring plan that will separate it into two separate firms next year with one focused on digital commerce and the other on ATMs. When the news was announced in September, the stock initially fell, but shares have since recovered. I expect NCR to continue to move higher as investors come to appreciate the value of the company and management’s future plans.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.

Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks.Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.

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