The market is at a tricky point as we head into the end of 2022. We know sentiment is fragile and growth stocks like technology companies are certainly feeling the squeeze. But, our tech use is certainly not down, and the chances of society regressing into an analogue world is pretty slim (we hope).
As such, there are a number of tech companies that are trading at a discount – particularly if we compare them to 2021 prices, where some were soaring high above at the other end of the spectrum.
These are some of the cheapest stocks under Morningstar’s coverage that our analysts believe have room to grow. We’ve filtered technology stocks by their price/fair value, ie how much cheaper they are than what our analysts believe they are worth.
What is a Technology Stock?
Earlier this week, my colleague James Gard dived into what it means to be a technology stock. How can we see the wood from the trees when everything around us is digitally enabled, disruptive, streamlined and innovative?
As an investor, one classification system is FTSE Russell’s Industry Classification Benchmark (ICB) and another is MSCI’s Global Industry Classification Standard (GICS). Morningstar divides stocks into cyclical, defensive and sensitive super sectors, with 145 industries. “Technology” belongs to the sensitive sector and includes IT service providers, software and hardware companies, cybersecurity firms, to name a few. Within Morningstar Direct, users can find 9,116 stocks listed in the UK – and over 1,000 of these are classed as technology.
Some of the biggest tech names are located in the US, and many of these listed on the Nasdaq, which to many has become a byword for US tech and synonymous with the multi-decade tech boom. Morningstar’s Global Technology index has 988 holdings: US equities make up about 75% of the index, and Apple (APPL) accounts for almost 20% on its own.
The Cheapest Tech Stocks
This list of stocks includes the 12 stocks trading at the biggest discount when compared to their fair value estimate (12 instead of 10 to include one wide-moat stock, Taiwan Semiconductor Manufacturing Co (TSMC) (2330), and one European stock, French Worldline (WLN).
Finding bargains in the technology space is not very difficult at the moment, due to the sell-offs we’ve seen so this year. While this list contains 12 stocks, there are 37 stocks with a Price/Fair Value of below 0.60, meaning they are trading at more than a 40% discount. Moreover, 39 stocks have a Morningstar Star Rating of 5. The five cheapest stocks are found in the US, Australia and Taiwan – and four of these have a narrow economic moat.
EML Payments (EML)
EML, currently the cheapest tech stock available, is a payment solution which allows a customers to facilitate and accept payments via a prepaid card or in real-time. It makes money primarily via clipping payment transactions. However, the Australian fintech has had a mixed 2022 financial year as underlying net profit fell flat, and Morningstar’s analysts cut the fair value estimate as higher operating expenses are expected to offset stronger debit volume growth.
Equity analyst Shaun Ler believes profitability will improve in time: “The outlook for revenue growth is good with no deterioration in the sales pipeline and conversion rates. Apart from winning new clients, EML aims to launch new programs with existing clients, including credible institutions like the UK Home Office.”
Lyft (LYFT)
Lyft, the second-largest ride-sharing service provider in the US, and has a narrow moat rating thanks to the network effect around its platform, riders, rides and mapping data. It focuses on taxis, ride-sharing, bikes and scooters. Currently, the company is trading at a 79% discount, and significantly below even its IPO price.
That said, Morningstar senior equity analyst Ali Mogharabi foresees the firm becoming profitable in 2024: “We think this growth will be driven by economic recovery after the pandemic, the firm’s continuing expansion in more markets, and an increasing adoption rate as the company attracts more users. We also think ride sharing can take revenue from public transportation, which we account for in our projections.”
MediaTek (2454)
Taiwanese MediaTek is the fifth largest and Asia’s largest "fabless" semiconductor company by revenue. It has a fortified market in midrange smartphones and a 70% market share in TV system-on-chips (SoCs). It has a high market share, but competition from companies like Apple and Samsung is putting pressure on MediaTek as both design their SoCs in-house. That said, the company is able to offer its customers unparallelled customisation, which is its strength.
Equity analyst Phelix Lee comments: “MediaTek has built up its reputation as a reliable SoC supplier and established strong relationships with customers, including smartphone manufacturers, by providing reference designs for more than 20 years. This and MediaTek’s knowledge in architecture serve as major barriers for new SoC designers.”
RingCentral (RNG)
RingCentral is an American unified-communications-as-a-service (UCaaS) provider. It enables cloud-based business communication and collaboration through messaging, video and phone functionality. Users are assigned a single business phone number and profile that allows for connection to the business network from any device and location. The field is highly competitive, with large players such as Microsoft, Zoom, and Cisco, but Morningstar expects the market to include some “co-opetition” and support multiple winners.
Senior equity analyst Dan Romanoff believes RingCentral is poised for success because UCaaS is becoming the business communication standard. “In our opinion, the customer stickiness and secular tailwinds will drive excess returns on capital for RingCentral over the next 10 years, especially as margins improve as the company scales.”
Uber (UBER)
As the largest on-demand ride-sharing provider in the world (outside China), Uber’s drivers have completed trips over billions of miles. With an extensive network and vast amounts of user data, the company should be able to improve its services further as well, even with increased competition from companies like Lyft.
“We expect net revenue to grow faster than portions of Uber’s cost of revenue, including hosting, transaction processing, and insurance costs, which will result in gross margin expansion,” Mogharabi says. “Within our 10-year discounted cash flow model, we assume the firm will begin generating operating income in 2024 and we expect operating margin expansion to 17% by 2031.”
