The charging  stock markets over the past year against a backdrop of a recessionary economy can be largely attributed to the exceptional growth of the technology sector. Consequently,  the valuations of tech stocks have gotten stretched and investors are growing increasingly skeptical about this. Analysts are predicting a potential market correction and are of the opinion that it is time for investors to adopt a more fundamental approach to investing. Moreover, the biggest tech companies, which have been driving broader market growth, some of which are currently under federal regulatory scrutiny, are expected to witness a retreat  in their share prices.

However, the recent resurgence in daily coronavirus cases is forcing many countries to reintroduce lockdown restrictions. Given this scenario, it seems less likely that the world’s dependence on digital connectivity is going to decline anytime soon.

So, it would be wise, we think, to consider investing in fundamentally strong tech stocks like International Business Machines Corporation (IBM - Get Rating) and Intel Corporation (INTC - Get Rating) that are currently trading at discounts to their peers and offer a reasonable risk-to-reward balance.

International Business Machines Corporation (IBM - Get Rating)

IBM provides integrated solutions and services worldwide. The company operates through five segments: Cognitive Solutions, Global Business Services (GBS), Technology Services & Cloud Platforms, Systems and Global Financing.

IBM’s forward-12-month p/e of 14.02x is 57.4% lower than the industry average of 32.87x. In terms of trailing-12-month price/sales, the stock is currently trading at 1.47x, 65.8% lower than the industry average of 4.30x.

In December, IBM entered an agreement to acquire European cloud management services firm Nordcloud to boost its hybrid cloud consulting capability. The acquisition should  advance IBM’s cloud migration and transformation capabilities and bolster the growth of its hybrid cloud platform.

Earlier in January, IBM collaborated with Avertra, a global integration services and consultancy organization, to help accelerate clients’ digital transformation in the energy and utilities industries. This should help IBM provide a common global infrastructure across all workloads that can run more intelligently and securely.

And a  couple of days ago, IBM unveiled its highly specialized Hybrid Cloud Build Team to support the migration and modernization of ecosystem partner products, services, and other offerings across its cloud environments.

IBM’s cloud revenue has increased 10% year-over-year to $7.50 billion in the fourth quarter ended December 31, 2020. The company has reported a gross profit margin of 51.7%, up 70 basis points from the year-ago value.

Analysts expect IBM’s revenues to increase slightly year-to-year to $74.20 billion in fiscal 2021 ending December 31. A consensus EPS estimate of $11.02 for the current year represents  a 27.1% improvement from the year-ago value. IBM has gained 8.4% over the past three months.

IBM’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

IBM has a grade of B for Value, Momentum and Quality. It is currently ranked #15 of 53 stocks in the B-rated Technology – Hardware Industry. Click here to see the additional POWR Ratings for IBM (Stability, Growth, and Sentiment).

Intel Corporation (INTC - Get Rating)

INTC is a leading semiconductor chip manufacturer that markets essential semiconductor technologies for the cloud and smart and connected devices worldwide. The company operates through five segments: PC Client Group, Data Center Group, Internet of Things Group, Mobile and Communications Group, Software and Services, and Others.

In terms of its forward p/e, INTC is currently trading at 12.94, 60.6% below the industry average of 32.87x. In terms of trailing-12-month p/s, the stock is currently trading at 3.14x, which is 27% lower than the industry average of 4.30.

INTC has undergone several leadership changes over the last month. The company has appointed Sunil Shenoy as its Vice President of Design Engineering Group and Pat Gelsinger as the CEO. INTC  seeks to boost its position in the chip making arena by leaning on new leaders with decades of experience.

In January, INTC launched its 11th Gen Intel Core vPro platform and Intel Evo vPro platform that will deliver the highest performance and most comprehensive hardware-based security. It also introduced a new N-series 10-nanometer Intel Pentium Silver and Intel Celeron processors.

In December, INTC announced its progress in developing integrated photonics for data centers. Optical technology is expected to increase the average speed of the internet, making the technology more efficient and thereby much demanded in the era of remote working.

INTC’s non-GAAP revenues have increased 8% year-over-year to $77.90 billion in the fiscal year ended December 26, 2020. Its non-GAAP net income has risen 3% from the year-ago value to $22.40 billion, while its non-GAAP EPS increased 7% from the same period last year to $5.30. Its non-GAAP free cash flow has increased 25% year-over-year to $21.10 billion.

Analysts expect INTC’s EPS to rise at a rate of 5.4% per annum over the next five years. The company has an impressive earnings surprise history; it surpassed the Street’s EPS estimates in three  of the  trailing four quarters. The stock has gained 23.2% over the past six months.

It is no surprise that INTC has an overall rating of B, which equates to Buy in our POWR Ratings system. INTC has a grade of A for Value, Sentiment and Quality. In the 96-stock, B-rated Semiconductor & Wireless Chip Industry, it is ranked #10.

Beyond what we stated above, we have also given INTC grades for Growth, Momentum, and Stability. Get all the INTC ratings here.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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IBM shares were unchanged in after-hours trading Tuesday. Year-to-date, IBM has declined -3.00%, versus a 4.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Rishab Dugar

Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...

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