Is ‘Cheap Tech Stocks’ an Oxymoron or Are There Some Real Opportunities?

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Feb. 18 2021, Updated 12:47 p.m. ET

The term “cheap tech stocks” might sound like an oxymoron looking at the elevated valuations of tech stocks, which might seem reminiscent of the dot-com boom days. However, there are still some cheap tech stocks that you can find in current markets. 

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U.S. tech stocks have rallied sharply over the last year. In 2020, the Bank of America Global Fund Manager survey’s findings showed that fund managers see long U.S. tech stocks as the most crowded trade. There have been some genuine concerns about a bubble in U.S. tech stocks. This year, long bitcoin has dethroned long U.S. tech stocks as the most crowded trade.

Cheap tech stocks in 2021

First, the definition of tech stocks as we have historically known has widened over the last few years. Electric vehicle stocks like Tesla, fintech companies like Affirm, and health companies like Clover Health are now also seen as tech companies. The kind of valuations that these companies enjoy is equivalent to tech companies. Their valuations are much higher than what traditional companies in these industries enjoy. 

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If you are looking at cheap tech stocks to buy in 2021, you can consider:

  • Alibaba (BABA)
  • Verizon (VZ)
  • IBM (IBM) 
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Alibaba looks like a good tech stock for investors

While e-commerce companies like Amazon, Shopify, and Etsy soared last year, Alibaba stock was a laggard. The company ran into trouble with Chinese authorities due to its outspoken co-founder Jack Ma’s comments against the regulators. China launched an antitrust probe into its tech companies, which seemed to be specifically targeted at Alibaba.

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China also stalled the IPO of Alibaba-backed Ant Financial. However, things seem to be getting on track for the company and Ant might come up with its IPO soon. Alibaba has continued to grow its earnings. The company's cloud operations also turned EBITDA positive in the December quarter.

From a valuation perspective, Alibaba looks cheap with an NTM (next-12-month) PE multiple of 23.3x. While there are macro risks associated with investing in Chinese companies, Alibaba’s risk-return tradeoff looks favorable in 2021.

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alibaba cheap tech stock to buy
Source: Koyfin

Verizon found a place in Warren Buffett’s portfolio

Known for his value investing strategies, Warren Buffett added Verizon stock to Berkshire Hathaway’s portfolio in 2020. Now, it's the conglomerate’s sixth-largest holding. Verizon stock trades at an NTM PE multiple of only about 11.3x, which looks attractive.

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Why IBM is a good bet for investors

IBM stock looks like another cheap tech stock that you can buy in 2021. The stock trades at an NTM PE multiple of 10.9x, which looks attractive. It's also a good dividend stock with an attractive yield of 5.4 percent. The company is a play on the booming cloud market after its acquisition of Red Hat. 

ibm stock valuation
Source: Koyfin
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Tech stocks are set for a bullish run

Tech stocks have rallied sharply over the last year and look set to rally more. The pace of digitization has increased due to the COVID-19 pandemic and more people are getting comfortable with going digital whether it's online shopping, Zoom calls, or signing documents electronically.

Tech sector’s outlook

The tech sector's outlook appears promising amid the increasing pace of digitization. While many people see tech stocks in a bubble, like they were in the late 90s amid the dot-com boom days, the current scenario is different. Tech companies in 2021 are among the biggest profitable companies and many of them also pay good dividends.

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