Tech stocks have been on a tear for the past 15 months. That was especially apparent throughout 2023 when the tech heavy Nasdaq increased by 43%, presenting opportunities in underpriced tech stocks to buy.
The reasons for the phenomenal performance includes the emergence of artificial intelligence, for one. Generative AI burst onto the scene and continues to make waves today. The technology promises to fundamentally change the face of business and humanity. It may very well be one of the seminal moments in human kind. Viewed from that perspective, it is then easy to understand why the market has reacted so strongly.
At the same time, the Federal Reserve slowed rate hikes that had crashed the market in 2022. The worst outcomes seem to have been avoided and that is positioning underpriced tech stocks to buy for a continued rebound.
2024 has also started positively, though not as strongly. The Nasdaq has risen approximately 9% since the new year. Today, there are still underpriced tech stocks to buy, despite all of the positive progress to date.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) is arguably one of the last names in most peoples’ minds when discussing underpriced and undervalued tech stocks. Share prices have risen from $148 at the beginning of 2023 and ended the year at $490. It was a phenomenal year for the company as it proved capable of monetizing AI to a degree that no other firm could match.
While the stock rested around $500, many were calling Nvidia overpriced. Here we are in the beginning of March and Nvidia’s shares are now trading around $800. Depending on where you look, analysts believe that shares could rise as high as $1,200 to $1,400.
It feels like investors are simply following emotion in deciding to be bearish or bullish in relation to Nvidia shares. However, there is one piece of evidence in my mind which strictly indicates that Nvidia continues to be undervalued, and that is the simple P/E ratio.
Almost 1/4 of the semiconductor industry bears a higher P/E ratio than Nvidia. That is crazy. Is it rational that the investors are willing to pay more for a dollar of earnings from 25% of the semiconductor industry than from Nvidia? If so, what is the justification? I’m asking rhetorically because I can’t see any rational argument that would justify such a decision.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing (NYSE:TSM) is similar to Nvidia in that investors are wondering how much further it can rise. Like Nvidia, TSM shares have increased in price of late.
The reason that Taiwan Semiconductor manufacturing shares have grown is simply that the company is forecasting a strong 2024. Just a few weeks ago the company gave guidance that it expects sales to increase by at least 20% throughout 2024. That’s an excellent signal for the entirety of the semiconductor sector of which TSM is the most important foundry.
Taiwan Semiconductor is deeply integrated into Silicon Valley and provides chips for the world’s most important firms. Recent news about its relationship with Apple (NASDAQ:AAPL) should serve to propel share prices higher.
TSM has produced 5 nanometer and 3 nanometer chips for Apple products including the iPhone and Mac computers. The company is currently working with TSM to develop 2 nanometer chips for future products. Those chips are expected to be present in products slated to be released in 2025. Furthermore, it is expected that TSM’s 1.4 and nanometer and 1 nanometer chips will feature in future products likely to hit the shelves in 2027.
TSM’s inimitable place in Silicon Valley implies that it may well still be undervalued at this time.
Cisco Systems (CSCO)
Cisco Systems (NASDAQ:CSCO) has entered buy-the-dip territory making it among underpriced tech stocks to buy. There wasn’t anything particularly wrong with its most recent earnings report other than the fact that Q3 guidance disappointed.
Yet, the market hates nothing more than uninspiring guidance. As a result, share prices have fallen. What remains is one of the leading Internet Protocol based networking firms globally. And one that is undervalued.
The price-to-earnings ratio is arguably the best known of all valuation metrics. It currently indicates that Cisco Systems is a relative steal. That P/E ratio is ranked better than 77% of industry competitors. It is also lower than the 10-year median for the company. That’s indicative that the market isn’t particularly interested in Cisco Systems at the moment. However, it should be.
Cisco Systems is ripe with opportunity — especially in relation to the emergence of artificial intelligence. Cisco Systems has an opportunity to further establish its name in security as concerns over safety rise due to AI. That is just one of many reasons to consider investing in CSCO stock at the moment. Otherwise, investors should simply consider that it provides a high yield dividend from within the tech sector.
— Alex Sirois
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Source: Investor Place