It is no secret that the U.S. equity market has been very jittery in 2022. With the market remaining highly volatile due to sticky inflation and expectations of rising interest rates in the U.S., and increasing geopolitical tensions associated with the Russia and Ukraine crisis, the technology sector has taken a severe beating. Some big tech names are now suffering after enjoying months of overstretched and overly optimistic valuations.
Yet, this sell-off can also prove to be a buying opportunity, especially for retail investors on a budget. Intel ( INTC -1.96% ) and Cloudflare ( NET -8.13% ) are two fundamentally strong stocks trading for well under $120 per share. Here’s why investors stand a chance to benefit significantly by picking up these reasonably priced investments and holding on to them forever.
The year 2022 has been quite challenging for Intel since investors are disappointed with the company’s recent earnings performance as well as its “2022 and long-term growth strategy.” Although the company widely surpassed consensus fourth-quarter revenue and earnings estimates, the market remained unimpressed as it expected even better performance in current times of ongoing semiconductor shortage. The analyst and investor community has expressed significant skepticism toward CEO Pat Gelsinger’s plans to opt for short-term pain (revenue and earnings decline in 2022) in exchange for long-term growth by ramping up investments.
Yet, there is still much to like in Chipzilla’s fundamental story. According to Mercury Research, Advanced Micro Devices ( AMD -3.31% ) accounted for 25.6% of the overall x86 CPU market in fiscal Q4 2021, a year-over-year improvement of 3.9 percentage points. Intel’s share dropped by the same percentage points to 74.4% in the same time frame.
However, while AMD has been growing rapidly in the server CPU market, Intel has been making its mark in the client CPU market. Thanks to its Alder Lake chips, Intel is rapidly capturing market share in the gaming segment. With AMD’s Ryzen 5000 series not including budget-friendly options for the low end of the gaming market, Intel’s i3-12100 CPU chip (from the Alder Lake series) seems to have this niche all to itself — at least for now (or at least until AMD comes out with the Ryzen 7000 series). Additionally, Intel is gearing up for the launch of more memory-intensive and power-efficient Raptor Lake client CPUs in 2022.
Intel is also investing aggressively to become a major foundry player for third-party customers. To that effect, the company is spending $20 billion for building two new “fabs” (semiconductor fabrication plants) in Arizona and has announced plans to build a manufacturing plant in Ohio. The company has strengthened relationships with foundry partners as well as substrate and equipment suppliers to ensure a smooth supply chain. The recently announced $5.4 billion acquisition of Tower Semiconductor ( TSEM -0.13% ) will enable Intel to create an end-to-end foundry business, which will now also include the production of chips catering to specialty areas, such as radio frequency controllers, industrial sensors, and power management.
Intel is currently priced at only 9.8 times current-year earnings, much lower than the median valuation in the semiconductor industry of 12.7. The company is rapidly gaining strength in the client CPU market and is revitalizing its foundry business. With Intel paying a handsome dividend yield of 3.06% and currently trading at discounted valuations, this stock can prove to be an attractive long-term buy for retail investors.
Another solid tech stock that has been caught up in the market’s shifting preference from growth to value stocks is Cloudflare, a prominent edge-based, content-delivery network (CDN) operator. The company operates 250 data centers across 100 countries, enabling 95% of the global population access to its network within 50 milliseconds. Edge-computing technology allows data and applications to be placed closer to the user’s computer, resulting in improved data reliability, lower lag time, and higher speed on the network.
Additionally, Cloudflare provides cybersecurity services to enterprises, such as web application firewall (WAF) and protection from distributed denial of service (DDoS) attacks. The company also offers a Zero Trust platform (involving continuous and real-time access management of networks, applications, and data). On Feb. 10, Cloudflare announced the acquisition of cloud-access security broker (CASB) player Vectrix. This move has further strengthened Cloudflare’s Zero Trust platform by adding a cybersecurity service enabling enterprises visibility and control over the data stored in their software-as-a-service (SaaS) applications.
Recently, the company has announced plans to acquire a security start-up, Area 1 Security, to add a strong email security product to its Zero Trust offerings.
Cloudflare has been quite successful in attracting new customers as well as retaining and cross-selling new services to existing ones. In fiscal 2021 (ending Dec. 31, 2021), the company added 588 large customers earning annualized revenue over $100,000. Cloudflare also ended Q4 with a dollar-based net retention rate of 125%, implying that businesses that were the company’s customers in fiscal 2020 spent 25% more in fiscal 2021, even after adjusting for churn. The company’s revenues surpassed consensus estimates, while non-generally accepted accounting principles (GAAP) earnings per share met analysts’ estimates in Q4. The company has also issued fiscal 2022 revenue guidance of $927 million to $931 million, widely surpassing consensus analyst estimates of $891 million.
NET PS Ratio (Forward) data by YCharts.
Cloudflare is currently trading at just over 38 times forward sales. Although the valuation is not cheap, it is still quite low compared to the levels at which the company traded for most of the past six months.
Against the backdrop of solid business fundamentals and improving financials, Cloudflare’s stock seems well poised for a solid runway in the coming years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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