Top 3 Cheapest Tech Stocks to Buy Now? (2019 review)
Tech stocks are always hot, so today we’ll look for the cheapest tech stocks in the stock market.
By “cheapest”, I refer to relative valuation. We also need to be circumspect, because the cheapest tech stocks may be cheap for good reasons.
We want tech stocks that are not selling at unreasonable multiples. There’s nothing wrong with buying growth stocks, but we don’t want to overpay for growth. Tech stocks are notorious for selling at very high multiples, and those multiples are not always justified.
So we want to be prudent in our selections, and find tech stocks that are not only growth stocks, but show elements of being undervalued. The famous investor Benjamin Graham cautioned that we should buy stocks that have a “margin of safety” with respect to valuation.
So this article is actually going to examine the safest and cheapest tech stocks.
The Cheapest Tech Stocks For 2019
If you’re in a hurry, below are our picks for the most lowest priced tech stocks as of this writing.
- Apple: Yes, it’s a tech stock, and yes, it’s still trading below intrinsic value.
- Microsoft: The legacy company has reinvented itself.
- Alphabet: It’s an advertising company, but it all driven by tech, and it’s cheap.
Keep reading and you’ll find out more about these inexpensive tech stocks and my thoughts on each.
Read more: The cheapest dividend stocks.
What Are Tech Stocks?
Technology stocks are not necessarily defined by any given set of criteria. What is considered a tech stock today is also not necessarily what it was considered twenty years ago, because technology has infiltrated our lives in countless ways.
For example, is a company like Samsung, which manufactures big screen TVs considered a tech company? What about Amazon? Netflix?
To me, a technology company is any company that is involved with manufacturing, development, research in, or distribution of, goods and services that have technology as a primary driver. They are also subject to repeated and rapid changes in their markets.
That, by the way, is why tech stocks are known to be volatile. There is so much change happening that a company can look like a leader in its sector one day, and be behind the curve on another. It also means competitors can turn their fortunes around suddenly.
Tech stocks can also include companies that make things that go into technology products.
That means a lot of things would qualify as tech stocks. So I’ve tried to select the three cheapest tech stocks that most people would consider tech stocks as well.
How Do You Determine What Qualifies As The Cheapest Tech Stocks?
The cheapest tech stocks have at least two of these three characteristics:
- Adjusted PEG ratio of 1.5 or less.
- One of the top three companies in that field
- Ongoing record of strong cash flow
Adjusted PEG ratio of 1.5 or less
If you are going to invest in the cheapest tech stocks, then those stocks sell at a price to earnings ratio that is no more than 50% higher than their long-term projected earnings growth rate.
Normally, I consider value stocks to be only those that have a PEG ratio of 1.0 or under.
However, because few tech stocks actually trade at that low a PEG ratio because they tend to be growth companies that demand higher multiples, I allow for a premium on what I would call “value tech stocks”.
By “adjusted PEG ratio”, I mean that I take the company’s total cash position and subtract long term debt, and subtract that amount from the company’s market cap. That way I am valuing the business on its own
I also award a 10% premium for companies with a large cash position, 10% for famous brand names, and 10% for companies with robust free cash flow.
One of the top companies in the field
Tech stocks are always fighting to maintain relevance. So finding a new small tech company may bring you great investment returns, but you may be taking on a lot of risk. That’s because those new companies must offer something very special that the big leaders in the sector do not have.
Thus, the cheapest tech stocks may be found in the small-cap or mid-cap arena, but it is unlikely they will be leaders in the field. So I prefer to take the large-cap stocks that have world-class brand names.
Record of strong cash flow
I talk a lot in my articles about the importance of cash flow. That’s because cash flow is what keeps high growth companies moving and competitive, in an area where change is happening rapidly.
That free cash flow is needed not only to reinvest into the business, but for research and development. If a company flails with its free cash flow, the stock may fall with it. A company can’t be competitive and improve its products if it is using all its cash paying off debt or putting current products out to market.
So I like to see tech stocks have at least a five year history of producing the free cash flow to pay expenses, reinvest in the business, do R&D and still have cash left over.
Here’s a video that helps you with investing in tech stocks, and finding possible candidates.
What is it?
Yes, Apple is definitely a tech stock, even though many investors may consider it to be more of a consumer stock. But there’s no reason why a tech stock can’t be a consumer stock and vice-versa.
Many tech stocks may be business-to-business companies, but you can’t argue that Apple doesn’t fit my tech stock definition: “involved with research, development, manufacturing, or distribution of goods and services that have technology as a primary driver. They are also subject to repeated and rapid changes in their markets.”
iCloud, iTunes, iPads, laptop computers, desktop computers, and most certainly the iPhone are tech-driven consumer products.
Read Also: Our Stock Price Prediction For Apple
What makes it a cheap stock?
Apple fits all the criteria I set out when it comes to qualifying as one of the cheapest tech stocks. Even more interesting, it rarely is overvalued on the criteria that I use. In that regard, I consider it the ultimate “growth at a reasonable price” (GARP) stock.
We start with valuation. Apple’s net cash position is a whopping $143 billion, although it was almost 70% higher at one point. It paid taxes to repatriate that money since most of it was held overseas.
When we back out that $143 billion, we get a market cap of $668 billion.
Next, I factor in the $60 billion in net income. Apple earned in the last twelve months. 668 divided by 60 gives us a P/E ratio of 11.1. Meanwhile, analysts project five-year annualized earnings growth of 13%.
Apple earns a 30% premium for all the bonus criteria I mentioned earlier, which means I add 30% to the growth rate of 13%, so that becomes 16.9%.
A P/E of 11.1, divided by 16.9, gives us a PEG ratio of only 0.65. That probably makes Apple the one of the cheapest tech stocks you can find.
It also routinely generates well over $50 billion in annual free cash flow.
What is it?
Microsoft Corporation is now a company that specializes in software, services, devices, and technology solutions. Its Office 365 is now both a product and service hub, with its Office, Exchange, SharePoint, Skype and other products.
Its Dynamics division offers higher end solutions for businesses, like enterprise resource planning, supply chain management, and analytics. It is really pushing Azure as part of its Intelligent Cloud segment.
And of course, it still is active in the Personal Computing division with all of its Windows products.
What makes it a cheap stock?
Microsoft went through a lousy period under Steve Ballmer, but a new CEO came in and has reshaped the company in ways nobody really expected. The company was refocused and became a perfect example of why cash and cash flow is so important.
Microsoft never would have been able to rebound this quickly without that cash flow.
2015 delivered $23.7 billion of free cash flow, and the fiscal year ending in June delivered $32.2 billion. That’s incredible, and one of the best reasons for owning the stock.
Microsoft has owns $63 billion in net cash, so the company is valued at $777 billion.
Net income was $30 billion over the trailing twelve months. The stock is thus valued at 26x earnings.
Analysts estimate 5-year annualized earnings growth at 13.68%, plus the 30% premium mentioned earlier, so the number rises to 17.8%.
Microsoft thus has a PEG ratio of 1.46, putting it right on the edge of being a bargain.
Read Also: What’re The Best Income Stocks?
What is it?
Alphabet might cause some controversy by naming it a tech stock. After all, almost all of its revenue is generated via advertising. But we aren’t talking about billboards. We are talking about using computers, conducting searches, and finding targeted ads pop up on the screen.
That’s technology driving every aspect of the business, especially the analytics involved in delivering those targeted ads.
What makes it a cheap stock?
Alphabet stock has done very well over the years, and I want to emphasize that it is the company’s free cash flow that is the reason for this.
2014 alone resulted in $12 billion of free cash flow. Yet that number reached $24 billion last year. With that much cash flow, Alphabet has been able to fund operations as well as its “other bets” division.
Google search engine is also the single most dominant force in online advertising. It destroyed Yahoo and all other competitors to the point where it now has a 90% market share. That puts it way at the top of the list in the sector.
Alphabet owns $113 billion in net cash. We then back that out from the market cap and find we subtract this company is valued at $628 billion.
Next, we look at net income. After factoring in the large tax bill from repatriation of cash, Alphabet had $29 billion in net income over the trailing twelve months. That puts the stock valuation at 21.6x earnings.
Analysts estimate 5-year annualized earnings growth at 15.22%. We bump that up by 30% for meeting the criteria mentioned earlier, bringing that number to 19.78%.
Alphabet thus has a very attractive PEG ratio of 1.09, also making it one of the cheapest tech stocks you can buy.
Read Also: Our Google Stock Price Prediction