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5 Undervalued Tech Stocks

Morningstar analyst Grady Burkett considers Apple and Oracle to be amongst the most undervalued tech names in the world

Alanna Petroff 3 January, 2013 | 3:48PM

Technology is one of the most undervalued equity sectors in the world right now, according to Morningstar's latest valuation estimates.

Specifically, the technology and energy sectors are presenting the best value for investors, according to Heather Brilliant, the vice president of Morningstar's global equity and credit research.

"[The] technology sector [is] particularly undervalued, at 86% of fair value. Several large-cap technology companies have seen their stocks fall materially in recent quarters, from Apple (AAPL) to Hewlett-Packard (HPQ)," stated Brilliant in the latest Morningstar "Market Outlook" report for Q1 2013. 

"The list of tech stocks down 10% in the past quarter also includes names like Microsoft (MSFT), EMC (EMC), and Intel (INTC). Although some of these stocks have been suffering from a weak global demand picture, others have faced more company-specific woes; in any case, we expect these challenges to clear up in the future and see opportunity in the tech sector," she said.

Below are five specific tech stocks that are being substantially undervalued by the market right now, according to Morningstar's associate director of tech equity research, Grady Burkett.

Apple (AAPL)
"Although Apple’s current market price implies maturity, we expect continued growth," stated Burkett in the latest Morningstar "Market Outlook" report. "Smartphones still account for less than 40% of total handset shipments, and we expect this penetration rate to continue to grow. Additionally, Apple still retains a dominant position in the tablet market, which should grow quickly over the next several years. Apple’s success in tablets and smartphones has helped the firm drive strong sales of its Macs, even as the overall PC market shrinks. As Apple sells more devices to its customers, it can increase customer switching costs around its software and services."

Intel (INTC)
"Concerns over the demise of the PC are exaggerated, in our view," said Burkett. "Regardless, Intel still has a strong growth driver in its server microprocessor business, where the firm is dominant, and has opportunities to break into smartphones and tablets with its low-power Atom chips. With a 4%+ dividend yield, rock-solid balance sheet and one of the most durable competitive advantages in the technology sector, we think Intel’s stock is attractive."

Oracle (ORCL)
"Oracle is one of the highest-quality names in our tech coverage universe, and we expect its core software business (which accounts for 68% of revenue) will continue to perform well in the near term," said Burkett. "Although Oracle’s hardware segment could generate underwhelming results in the next few quarters, we believe this business has solid long-term prospects, and it will enable the firm to drive additional software sales over time and further strengthen its wide economic moat."

Applied Materials (AMAT)
"Applied is the behemoth of the semiconductor equipment industry, with unmatched scale and a broad product portfolio, making it the closest thing to a one-stop shop for chip manufacturers," said Burkett. "Although the firm’s foray into the solar equipment industry has weighed on financial results, the stock has been overly punished, in our view. As semiconductor circuit sizes continue to shrink, demand for Applied’s complex tools and services will continue to grow."

Check Point Software Technologies (CHKP)
"Check Point is a leading provider of network security solutions," said Burkett. "The network firewall market is a slow-growth area, but we expect the company’s appliance strategy and software blade architecture will enable it to grow faster than the core firewall market. High switching costs and risks make Check Point’s network security solutions very sticky, enabling the firm to deliver high operating profitability. Although upstarts like Palo Alto Networks pose a legitimate threat, we expect Check Point’s market price to rise toward fair value as investors realise that the firm’s competitive advantages are intact."

Morningstar's Star Ratings for equities are calculated based on what the current value of the shares are in the market versus what Morningstar analysts believe the fair value of the shares should be.

A high star rating, such as a 4- or 5-star rating, indicates that Morningstar believes the shares are very undervalued and this could be a time to buy in for cheap. Alternatively, if you see a stock with 3-stars that indicates the stock is being fairly valued by the market. Stocks with 1- or 2-star ratings are being overvalued by the market, according to Morningstar analysts. 

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Apple Inc524.75 USD-1.31
Applied Materials, Inc.19.25 USD-0.57
EMC Corporation25.91 USD-3.18
Hewlett-Packard Co31.74 USD-0.09
Intel Corp26.75 USD-0.34
Microsoft Corporation39.69 USD-0.75
Oracle Corporation39.79 USD-1.66
צ'ק פוינט טכנולוגיות תוכנה בע"מ67.60 USD-1.02
About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.