Over the past five years or so, high-growth stocks in areas such as software-as-a-service and e-commerce have dominated the market, leaving more cyclical and cheaper value stocks in the dust.
However, the script has flipped in 2021. As vaccines are distributed and stimulus payments make their way into bank accounts, a potential strong economic recovery has investors more bullish on the economy than they've been in more than a decade. That dynamic favors cyclical and value stocks, which are booming.
Given the absolutely massive valuation gap that existed between value stocks and growth stocks heading into this period, the recent move in value stocks may only be the beginning of multiyear outperformance. That's why Seagate Technology (STX +0.00%), Super Micro Computer (SMCI +3.18%), and Discovery Inc. (DISCA +0.00%) (DISCK +0.00%) could each double from current levels, despite big gains year-to-date.
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Seagate Technology: Dropping the HAMR in storage technology
Seagate has been an excellent dividend stock over the past decade, but its share price hadn't done much until recently. Seagate primarily makes hard disk drives, a storage medium many thought would be displaced by the smaller and faster NAND flash over time. As such, Seagate has typically generated low or no growth in the past five years; however, since there are only a couple hard disk drive companies left in the world, it has been consistently profitable and cash-flowing.
Yet in the age of massive storage needs, investors may now be coming around to the idea that HDDs aren't going away anytime soon; in fact, they could be entering a new era of growth. After all, in this big data area, the amount of data stored is projected to double every three years.
While NAND flash has come down in cost, hard disk makers aren't standing still on the innovation front either. Thanks to Seagate's advances in heat-assisted magnetic recording (HAMR) technology, it has continued to pack more and more data onto each disk and lower costs per gigabit at a tremendous pace. In fact, hard disks still have an eightfold cost advantage against even the most efficient NAND flash modules, even as NAND pricing has come down massively in recent years. Seagate's new HAMR 20TB disks are just hitting the market in 2021, and the company has outlined a path to 50-terabyte disks by 2026. For large-scale, bulk storage for enterprises and cloud players, hard disks are still the lowest-cost storage medium and will be in use well past this decade.
Seagate also just introduced an entirely new storage platform called Lyve -- a platform that integrates storage, systems, and open-source software in a new kind of storage-as-a-service solution. Lyve allows customers to efficiently and securely move data from data centers, to the edge, to endpoints seamlessly and securely. Management forecasts Lyve could add more than $600 million in high-margin revenue by 2025. That's about a 6% addition to Seagate's $10 billion in revenue over the past 12 months, and it's likely to add even more in profit.
Even though Seagate is up about 19% year to date, it still trades at only 15 times this year's earnings estimates. If Seagate can grow operating profits at the high end of its 6%-13% annualized growth target, and add even more in EPS because of ample share repurchases (it has retired 27% of shares outstanding over the past five years), its stock could very well double over the next three to five years, all while delivering an increasing dividend that currently yields an ample 3.6%.
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Super Micro Computer: Returning to growth after three stagnant years
Another value candidate that could easily double in the next few years is Super Micro Computer (SMCI +3.18%), a server assembler with a history of outgrowing the market. Like fellow hardware peer Seagate, Super Micro should see increasing demand as the big data, 5G, and artificial-intelligence eras kick into high gear. But also like Seagate, its stock is cheap, trading around 11.3 times EPS estimates for fiscal 2022, which ends in June 2022. And that's despite a 20% year-to-date appreciation in the stock.
Super Micro went public in 2007 and was a high grower up until 2017, when it ran into accounting troubles and had to delay its annual report. The company then had to take its foot off the gas and fix its internal controls. After missing the remediation deadline, Nasdaq delisted the company back in late 2018 but then eventually relisted the company in January 2020. The good news is that Super Micro didn't fabricate any sales or cash flows; the accounting issue was a matter of timing of sales and prematurely recognizing revenue before products were shipped. The CFO who committed these violations is long gone, the company's internal controls have been fixed.
Dealing with its accounting problems slowed Super Micro's growth, as revenue has stalled at a little over $3 billion for the past few years. However, management recently outlined a path to resume rapid growth and reach $10 billion in revenue over the next three to six years. Super Micro has historically sold directly to enterprises for their data centers. However, with the recent completion of a new Taiwan manufacturing plant, Super Micro is now aiming to attack large new markets in 5G telco, edge computing, large cloud data center customers, and even new software offerings.
If management can pull off its strategy over the next few years, the upside could be big. In fact, CEO Charlies Liang is taking just $1 in salary in the company's new executive compensation scheme. He will also qualify for stock options with a strike price of $45, based on five levels of stock price and revenue appreciation. The stock is only at $38 today, so Liang doesn't get paid unless the company's sock goes much higher from here. The fifth and highest tranche of the compensation scheme is payable if the stock price reaches $120 and revenue hits $8 billion in the next few years, which gives you an idea of the potential upside.
You can be sure management will do everything it can to reach those goals, meaning the stock could more than triple within five years if it succeeds.
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Discovery, Inc.: A legacy cable network makes its case in the streaming era
Switching gears to the media world, Discovery Inc. has been on an absolute tear as of late, with the stock up almost 150% year to date. With that kind of near-term outperformance, how could the stock even double from here?
Well for one thing, the stock was really, really cheap to begin with. Even after its huge run, Discovery trades for around only 14.6 times last year's free cash flow. Moreover, last year was a down year for cash flow amid COVID. In fact, Discovery is trading at only 11 times its 2019 free cash flow.
Investors have been bearish on legacy cable TV names for years, as they have been scared that the streaming revolution would disrupt their business. However, many legacy cable names are now rolling out their own streaming services, and subscriber growth has been better than many expected. Discovery's new service, Discovery+, also inked a prominent partnership with Verizon (VZ +0.02%), which is offering a free 12 months of Discovery+ for subscribers to its unlimited plans, and Discovery has similar partnerships with Europe telcos as well.
With the advent of streaming and then the arrival of COVID last year, investors thought Discovery could potentially have serious problems. However, advertising revenues were essentially flat for the full year 2020, which is not too shabby in a pandemic year. Discovery's low-cost but high-quality unscripted content also continued to earn strong market share across key female demographics, so it appears there could be strong demand for Discovery's shows, whether through traditional cable or new over-the-top streaming services.
We'll see if new Discovery+ subscribers stick around after free trials end and the economy opens up, but if they do, Discovery could prove it's a growth business, not a declining one as many had feared. If that happens, I see no reason it can't trade at a free cash flow multiple in the 20s, which means the stock could very well double in the span of a few years.
