The technology sector is soaring as a leading market performer this year. Notably, the Technology Select Sector SPDR Fund (NYSEARCA:XLK) is up an astounding 52%. Despite these gains, there remain undervalued tech stocks to consider in December.
Due to the rally, most technology stocks are a bit overvalued. The AI buzz has lifted many boats, including some with poor fundamentals. At the same time, some value stocks in technology have been ignored. Today, these undervalued tech stocks are bargains that could deliver significant gains going into 2024.
These companies are generating robust free cash flows and profits today, reporting solid revenue growth numbers. All three trade below 15 times free cash flow and forward earnings. Yet, they grew revenues sequentially in their latest quarter and increased earnings per share by over 10%. Given the solid fundamentals, these tech stocks are buys.
Cisco Systems (CSCO)
Cisco Systems (NASDAQ:CSCO) is known for its networking hardware, including equipment like switches and routers. Traditionally, this business has been highly cyclical, and Cisco has had a lower multiple than tech peers. However, the company’s revenue mix is evolving, making Cisco one of the top undervalued tech stocks.
CSCO stock trades at a forward price-to-earnings (P/E) of 12 and a price-to-free cash flow of 11. Indeed, the market values the company as a low-growth cyclical business. Yet, the company has dramatically improved its revenue mix by adding software revenues.
Today, the company generates significant software revenue from security and collaboration applications. Based on Q1 2024 results, recurring subscription revenues were $6.5 billion, representing 44% of total revenues. This mix will improve further if the announced acquisition of Splunk (NASDAQ:SPLK) is completed.
The deal will form a global security and observability leader since Gartner considers Splunk a security information and event management leader. After integration, management expects to deliver AI-enabled solutions to organizations globally. Further, Splunk’s security and observability capabilities will complement Cisco’s existing portfolio.
Financial benefits translate into an immediately positive cash flow. Additionally, it will lead to gross margin expansion and accelerate Cisco’s revenue growth. Lastly, the deal will add $4 billion in annual recurring revenue, pushing total recurring revenue to almost $30 billion.
On Splunk’s close, Cisco will generate over 50% of revenue from subscriptions. At 12 times forward EPS, it’s one of the undervalued tech stocks to buy. Cisco is no longer a hardware company but an increasingly profitable software company.
Gen Digital (GEN)
Cybersecurity is one of the hottest sectors in the market. This year alone has witnessed attack after attack on public and private organizations. Local authorities, government agencies, and companies such as Clorox (NYSE:CLX) and MGM Resorts International (NYSE:MGM) have all suffered serious breaches.
In response to surging cyber risks, organizations are increasing their security budgets. This acts as a tailwind for one of the most undervalued tech stocks, Gen Digital (NASDAQ:GEN). At 11 times FY2024 EPS, the stock is a bargain.
Looking at earning estimates, GEN stock is just too cheap to ignore. For the current fiscal year, analysts expect 10.6% growth. And for the year ending March 2025, a 14% increase is expected, with EPS at $2.28. This leaves the stock trading at a bargain 10 times FY2025 earnings.
Analysts have recognized the value in the stock in recent weeks. On November 16, Bank of America initiated the stock with a “buy” rating and a $25 price target. The bank’s analysts see massive cross-sell and upsell opportunities. Also, they believe Gen Digital has a $20B total addressable market and more growth through international expansion.
Additionally, Morgan Stanley sees more upside in the stock and has a $26 price target. They bumped GEN stock to “overweight,” citing improving margins due to cost synergies from recent acquisitions. And, they expect improved fundamentals as the company repays debt and improves its capital structure.
Given the demand tailwinds and improving margins, Gen Digital is one of the most undervalued tech stocks. The stock is set for a valuation reset over the next year.
Dropbox (DBX)
Dropbox (NASDAQ:DBX) has stable revenue growth, robust free cash flow and is an AI beneficiary. Its content collaboration and storage systems platform is one of the most undervalued tech stocks to buy.
Although revenue growth has slowed, the company has made up for that through free cash flow growth. The 2022 revenue slowed to 7.7% compared to 12.7% in 2021. However, free cash flow per share grew to $2.11 from $1.81, representing 16.8% growth.
In terms of P/E, the stock is a bargain. Over the trailing twelve months, the company has generated $1.61 in EPS. Thus, it trades 17 times TTM EPS. Additionally, if you consider the full year 2023 EPS, the multiple drops to 14 times earnings.
Besides being cheap, Dropbox has some exciting initiatives that could spur growth. Recently, it announced a collaboration with Nvidia (NASDAQ:NVDA) to improve customer productivity. Dropbox customers will use AI tools to improve search accuracy, simplify workflows, and organize content.
Furthermore, the company is cutting costs to boost earnings. For example, in October, it announced it was reducing its corporate headquarters. As a result, management expects to save $227 million in rent and maintenance fees. These cost cuts will provide a boost to margins.
Considering the expanding margins and reasonable valuation, Dropbox is a buy. Its profitability stands out, with non-GAAP operating margins hitting 36.0% in the third quarter of fiscal 2023 results. Furthermore, management expects to leverage AI and machine learning to provide value to customers, driving revenue growth.
On the date of publication, Charles Munyi did not hold (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.com Publishing Guidelines.
