Artificial intelligence (AI) is rapidly expanding into various industries. However, not all companies have been able to benefit from this growth immediately. Lesser-known data center stocks, for example, are experiencing strong demand. This could substantially boost profits as big tech continues pouring billions into expanding AI capabilities.
Massive AI development investments of Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META) and Apple (NASDAQ:AAPL) have largely aided infrastructure companies. Nvidia (NASDAQ:NVDA) clearly succeeds as a manufacturer of the crucial chips powering AI. And, Super Micro Computer (NASDAQ:SMCI) sees rising business from hardware sales.
Yet, according to Goldman Sachs, the data center stocks sector is expected to see the highest growth among all capital goods markets this year and through 2027. The bank forecasts a compound annual growth rate (CAGR) of 24% for data centers over the next three years.
As demand for AI surges, three data center stocks are well positioned for potentially exponential growth, with a solid focus on growing sales.
GDS Holdings (GDS)
Hong Kong-based GDS Holdings (NASDAQ:GDS) develops and operates data centers in China and Southeast Asia. It is actively expanding its international footprint, so this could offer higher growth potential than its domestic market. The company has rapidly expanded its infrastructure capacity. The total area committed and pre-committed by customers rose by 5.4% year-over-year (YOY). Also, the area in service increased by 12.5% YOY.
While sales increased 9.1% in the prior year and customer commitments grew, the company is not yet profitable. However, it heavily invests in building new facilities to meet demand and reduce backlogs. This strategy is well-aligned with Chinese government support for the tech and AI sectors, areas driving the growth of data center stocks.
The company remains undervalued relative to its potential. Its $8.09 billion enterprise value significantly exceeds its $2.15 billion market cap. This disparity helps explain analysts’ optimism, with all recent ratings recommending GDS stock as a buy. On average, price targets point to a 45% upside over the near term to $14.89 per share.
Vertiv (VRT)
Vertiv (NASDAQ:VRT) provides critical digital infrastructure solutions as demand for data centers grows. The company designs and manufactures essential power management and cooling systems crucial for heat management. This includes advanced liquid cooling technologies that are becoming more prevalent as AI scales.
Strategic investments in areas like AI and high-performance computing are expected to drive long-term demand for Vertiv. Data center spending is also growing substantially to support more digital services and complex data processing, which are integral to Vertiv’s business.
Vertiv has shown solid growth and execution. In its recent second quarter, the company posted EPS growth of 114.1% YOY and reported 12.6% revenue growth YOY. In addition, it raised its full-year outlook on strong demand and operations. The company has seen a 60% YOY increase in organic orders, largely from AI deployments.
With a record-high order backlog indicating future potential, Vertiv is well-positioned for continued growth. Analysts project an average price target of $105.37 per share, suggesting a 55% potential upside from current levels. This follows a 90% gain over the past year while it still trades 38% below its peak of $110 per share.
Silicon Motion Techn ADR (SIMO)
Silicon Motion (NASDAQ:SIMO) manufactures solid-state memory drives that are key components used in data centers and other applications. The company expects its sales growth to be in the range of 25-30% this year. Recently, SIMO reported second-quarter earnings that showed a 15% sequential increase in quarterly revenue.
Showing consistent revenue growth, Silicon Motion driven by strong demand for its NAND flash controllers and SSD solutions. For the full year 2024, it expects revenue between $800 million and $830 million, representing a 25% to 30% YOY increase. However, growth may be slightly delayed as the company implements new controller technology, after which it forecasts sales will return to increasing.
SIMO stock trades at a relatively modest price-to-earnings (P/E) ratio of 26.6 times compared to the sector average of 34.1 times. Analysts believe SIMO stock has strong future prospects, with 11 out of 14 recommending buying it. The average analyst price target is $93.89 per share, implying a potential upside of as much as 58%.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
