3 Alternative Tech Stock Picks

Looking for good value equities in the tech space? Ignore the FAANG stocks and consider these three lesser known companies says Killik & Co

Emma Wall 13 September, 2018 | 2:25PM
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Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I am joined today by Rachel Winter from Killik & Co. to give her three stock picks.

Hi Rachel.

Rachel Winter: Good morning Emma.

Wall: So, what's the first stock you'd like to highlight today?

Winter: First one is a company called Teradyne (TER). This is an American company and it's involved with cobots, collaborative robot. So, we think that’s probably one of the big buzz words of the year. So, I think it's quite widely acknowledged we are on the cusp of the fourth industrial revolution. So, the first one probably back in 18th century when hand manufacturing techniques were replaced by steam machines.

Then we had electricity coming along. Then we had the digital revolution. So, computing and the internet and the next one where we started to involve automation, artificial intelligence and more computing and robotics. So that’s why we started looking at robotics.

Now Teradyne is actually a business that’s been involved in testing semiconductors and at the moment that’s still the major part of the business and its still very important as we start to use more complex chips in our laptops, in our phones. But why we like it now is in 2015 they bought a business called Universal Robots and that’s heavily involved cobots and at the moment it has over a 50% market share in the cobot space.

Last year the revenue from that division was up 70% and they think they can achieve over 50% growth per year up out to 2021. So huge growth potential here and we think this cobot division will become increasingly important for Teradyne.

Wall: Now each of these revolutions there were winners, big, big winners that went on to dominate the market for nearly centuries after industrial revolution. But there were also losers particularly thinking of the dotcom bubble bursting. How do you identify a company that’s going to thrive in this new AI environment and one that is just an upstart start-up?

Winter: Well I think having over 50% market share at the moment and I think having such impressive sales growth does give you an indicator that this is hopefully one of the successful ones. And back to your earlier point I think having a lot of losers from each industrial revolution I think it's quite important to look at that. And what's quite nice about Teradyne is they are focusing on cobot. So, humans working alongside robots.

So, you are not necessarily getting rid of loads of jobs you are actually just getting robots to help with more difficult and more time consuming or the more repetitive tasks and you have still got a lot of humans employed so that’s one of the reason why we like it.

Wall: And what’s the second stock today?

Winter: Second one is IBM (IBM). It's one of the biggest technology companies in the world and this is one that we think is a little bit misunderstood. So, it's very much seen as an old school hardware manufacturing business and it trades on price to earnings multiple of 10 times. That’s incredibly low.

Wall: Very cheap compared to other tech stocks.

Winter: Yeah, and the market in general trades at probably about 16 times and then some of the bigger tech companies are on 20 or 30 times. So, being on 10 times very low indeed. And that’s the sort of multiple you'd expect from a low growth standard hardware manufacturing company. That’s not IBM.

Over the last few years they've been selling off their hardware businesses, they have invested in what they called strategic imperatives. And that’s things like analytics, cybersecurity, cloud computing, artificial intelligence and now revenue from that part of the business is worth more than 50% of their overall revenue. So, in our view IBM is no longer just a hardware manufacturer and we very much think it's undervalued.

Wall: And what’s the third and final stock.

Winter: Third one is Match Group (MTCH), which I think is quite an interesting one. So, this is involved online dating which is very much a high growth area. Now Match owns about 45 different dating brands. It's really a huge number. And that includes the most well-known ones like Match.com and particularly Tinder. So, we think this is a space that is growing very quickly particularly as it becomes more widely accepted and people become more comfortable with it.

So, starting with Tinder that’s done very well from the so-called freemium model, where the standard fashion is free to download and then they can charge users for extra features. And Tinder's got more than 50 million daily active users. It's an incredibly popular app. And then another high growth area for Match is actually the over 50s dating market.

So, this is a market where people are perhaps are more willing and more able to pay. So, where there might be less users in this particular segment they do tend to pay a lot more so that has been quite profitable for Match over the last couple of years.

Wall: Now there have been some quite high-profile companies who have been hit by data breaches. I imagine Match is one of those ones who would have to take that incredibly seriously given the nature of their business. Is that something that you consider when analyzing the stock.

Winter: It definitely is. So, any technology company, any company involved in handling people's data particularly sensitive data such as people's dating profiles. I think it's very important to look at that and I think Match is very heavily involved in looking at their own cybersecurity.

Wall: Rachel, thank you very much.

Winter: You are welcome.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
International Business Machines Corp136.23 USD0.10Rating
Teradyne Inc144.76 USD4.68Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar