In this piece, we will take a look at the 15 best data center stocks to buy according to Jefferies, Citi and Wall Street Analysts.
The boom in the interest surrounding artificial intelligence has not only affected semiconductor stocks, even though they’re the biggest beneficiaries. While the chips that these companies make are indispensable for running AI workloads, they have to be housed somewhere, and this is where data centers come into play.
In fact, for the data center space, AI has only accelerated the growing demand this industry is seeing. Prior to AI GPUs and accelerators, enterprise computing chips made by the same companies that are now making AI chips were seeing hefty demand. This demand led to gaming GPU companies effectively being transformed into enterprise computing firms, with sectors such as the SaaS and cloud computing industries relying on these products. For some SaaS stocks, you should check out 10 Best SaaS Stocks To Buy Now.
This pre AI demand for data centers is visible in statistics too. Data from Jefferies shows that the demand growth for data centers has jumped by between 10% to 20% for the last 15 years, or before AI GPUs hit the market. As expected, AI has accelerated this demand, with the demand for data center space outpacing 30% in most markets for the past two years. This growth in real estate requirements also means that while the computing industry might be able to scale up by providing products like networking gear and cables, tertiary industries like energy generation will take some time to catch up.
If you’re a believer in AI, then the optimistic line of thought would suggest that these tertiary firms will only grow in the future as they scale up their operations to meet the growth in AI data centers. After all, data from Goldman shows that a query made to ChatGPT consumes ten times as much energy as a Google search query – understandable since ChatGPT is parsing through data and drawing insights to generate a response. By 2030, AI is expected to grow data center power demand by as much as 160%, as data centers potentially account for 4% of global energy consumption and Europe in particular needs more than $1 trillion to power its AI grid.
Naturally, since the US is responsible for ushering in AI, AI energy consumption in America is higher than that in other countries. According to the Boston Consulting Group, by 2030, AI power consumption will account for 16% of all of America’s energy use. It is expected to grow by 15% to 20% annually and touch as much as 130 GW, or the amount of electricity that’s used by 100 million homes. AI chip companies are also aware of these trends, with the latest AI chips promising to improve energy efficiency by 25x. Improving AI performance at the semiconductor level is important especially since some areas where data centers are growing are being forced to turn to coal power to reduce the power gap.
Nowhere is this clearer than in Northern Virginia, where data centers process 70% of the world’s internet traffic. With more than 300 data centers that churn out more than $700 million in taxes annually, the region’s computing centers are expected to require a whopping 11,000 megawatts of electricity annually by 2035 according to estimates by the local regulator. This demand has also spurred a $5.2 billion effort to lay down new transmission lines and keep coal power plants open for longer than initially planned.
Not only does AI need real estate and power, but it also needs water. Since energy can neither be created nor destroyed, all the megawatts of power that AI chips need have to go somewhere. For the chips, it is dissipated in the form of heat, and cooling this requires copious amounts of water. Estimates show that not only does training GPT-3 evaporate a whopping 700,000 liters of drinkable water, but global AI demand by 2027 could end up using anywhere between 4.2 billion to 6.6 billion cubic meters of water.
Coming back to real estate, it might be the easiest way for the AI savvy investor to cash in on the world’s thirst for computing. Citi believes that the “development and construction of hyper-scale data center capacity will grow meaningfully over the next 7 years,” as global industrial giants expand into the data center space. Not only are industrial firms actually converting their warehouses into data centers, but Citi adds that the associated power demand for these computing facilities will grow between the mid teens annually until 2030.
So, as these Wall Street firms lay out a maze of industries that will profit from AI, we decided to look at the top data center stocks to buy according to analysts.
A futuristic datacenter with servers and high-tech equipment, signifying the company’s cutting-edge digital technology.
Our Methodology
To make our list of the top data center stocks to buy, we ranked the US listed holdings of Global X’s data center ETF and the stocks chosen by Jefferies and Citi by the average analyst share price target percentage upside and picked out the stocks with the highest upside.
For these stocks, we also mentioned the number of hedge funds that had bought the shares in Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
15. Equinix, Inc. (NASDAQ:EQIX)
Average Analyst Share Price Target Upside: 18%
Average Analyst Share Price Target: $905.73
Number of Hedge Fund Investors in Q1 2024: 66
Equinix, Inc. (NASDAQ:EQIX) is a data center collocation and hosting company which means that it provides businesses with the real estate to host their servers. It is one of the few stocks on our list that’s on both Citi and Jefferies’ lists. Citi believes that the firm not only offers a “valuable hub” for cloud and generative AI products. Additionally, Equinix, Inc. (NASDAQ:EQIX) offers a “fully managed service for Nvidia AI.” Jefferies had set a $910.86 share price target for Equinix, Inc. (NASDAQ:EQIX) in late June 2024, which provides a hefty upside over the current share price of $778.79. One key advantage that Equinix, Inc. (NASDAQ:EQIX) enjoys over its rivals is that the firm has been in business since 1998. This provides it with a key advantage when it comes to customer relationships, which are key in today’s environment when spending might drop due to an economic downturn. This means that while Equinix, Inc. (NASDAQ:EQIX)’s revenue will slow in case businesses cut back spending, it will pick up again when the economic clouds improve.
Equinix, Inc. (NASDAQ:EQIX)’s management commented on its robust momentum and industry presence during the Q1 2024 earnings call where it shared:
“We had a great start to 2024 driven by our highest Q1 bookings performance on record, strong conversion rates, completely favorable pricing dynamics, and lower-than-expected churn, all resulting in our 85th key quarter of top-line revenue growth, the longest such streak of any S&P 500 company. We closed more than 3,800 deals across more than 3,100 customers for the quarter demonstrating both the scale and the consistency of our go-to-market machine. And we again saw accelerating hyperscale demand translate into robust xScale leasing in both EMEA and Asia. While we continue to operate in an environment of broader economic uncertainty, and see some level of corresponding customer caution, our forward-looking pipeline is strong, and we remain optimistic about the opportunity ahead.”
14. Freeport-McMoRan Inc. (NYSE:FCX)
Average Analyst Share Price Target Upside: 25%
Average Analyst Share Price Target: $50.62
Number of Hedge Fund Investors in Q1 2024: 86
Freeport-McMoRan Inc. (NYSE:FCX) is one of the more interesting Jefferies data center stock plays since it’s a mining company. It produced a whopping 1.1 billion pounds of copper in 2023, and the metal is why the investment firm believes that Freeport-McMoRan Inc. (NYSE:FCX) is a great data center play. Copper is the dominant metal when it comes to data centers and computers, and the shares have received a Buy rating from Jefferies. Freeport-McMoRan Inc. (NYSE:FCX) is quoted by several sources to be one of the biggest, if not the biggest copper producers in America. This lends it a significant competitive advantage since expanding production in the mining industry often comes with hefty capital expenditure, making it difficult for rivals to catch up in the short term. However, it also leaves the stock vulnerable to economic downturns, as the demand for the metal drops in a slow economy as evidenced by the sluggish demand in China. Conversely, any pickup in economic activity as indicated by lower interest rates tends to be beneficial for the shares.
Freeport-McMoRan Inc. (NYSE:FCX)’s management commented on its future outlook during the Q2 2024 earnings call where it shared:
“We’ve discussed on prior calls, the impact of macro sentiment and investor positioning that can drive large moves in pricing. Richard referred to the domestic economic challenges in China, the ongoing weakness in the Chinese property market, destocking and working capital management and increase in copper exchange inventories and delays in actions to stimulate economic growth, which have all weighed on the market. In the U.S., we’re seeing — continuing to see strong demand for copper from a broad range of sectors. And globally, we favorable demand drivers for the future associated with copper’s increasingly important role in the global economy. Copper is a foundational essential metal when it comes to electrification, and the world is becoming more and more focused on copper-intensive energy applications.
The facts are its physical characteristics and superior conductivity make it the metal of electrification. New massive investment in the power grid, renewable generation, technology infrastructure and transportation are driving increased demand for copper and forecast call for above-trend growth and demand for the foreseeable future. As we review the fundamentals and match the demand side up with supply, we look at the limitations of existing supply growth, the challenges and extended time frames required to build new supplies and projections for peak mine supply over the next couple of years. These factors, combined with secular demand trends point to tight market conditions as we go forward. With Freeport’s leading position in the industry, large-scale current operations and future growth pipeline, we’re very well positioned to benefit from this fundamental outlook in the future.”
13. NVIDIA Corporation (NASDAQ:NVDA)
Average Analyst Share Price Target Upside: 25%
Average Analyst Share Price Target: $125.43
Number of Hedge Fund Investors in Q1 2024: 186
NVIDIA Corporation (NASDAQ:NVDA) is the hottest stock in the AI sector right now. However, the fact that its shares are up by 135% over the past twelve months means that further upside is limited. NVIDIA Corporation (NASDAQ:NVDA) dominates the data center industry due to its plethora of GPUs and bundles. Not only does it sell standalone GPUs, but it also sells them in clusters that are tailor made for AI use. The GPUs’ tight integration with their CUDA software means that NVIDIA Corporation (NASDAQ:NVDA) customers enjoy a significant advantage when it comes to squeezing the most performance from the products. However, the very fact that it sits at the top of the AI supply chain leaves NVIDIA vulnerable to competitors and customers designing their own chips and regulators deciding that it has abused its competitive power. However, analysts are certain of robust demand for NVIDIA Corporation (NASDAQ:NVDA)’s products until at least 2025 end.
Aristotle Atlantic Partners mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the firm said:
“Nvidia contributed to portfolio performance in the second quarter as investors continued to view positively the new product roadmap for the rest of the year. The company sees accelerating demand for its GPU semiconductors from hyperscalers and enterprises. Nvidia’s GPU semiconductors continue to be the industry-leading building blocks of the accelerated computing data center architecture to drive AI compute and applications.”
12. Intel Corporation (NASDAQ:INTC)
Average Analyst Share Price Target Upside: 27%
Average Analyst Share Price Target: $25.48
Number of Hedge Fund Investors in Q1 2024: 77
Intel Corporation (NASDAQ:INTC) is the troubled chip maker whose shares fell more than 30% in August after its latest earnings saw the firm miss analyst revenue and EPS estimates. The firm is struggling to deliver on a turnaround plan led by its CEO Patrick Gelsinger, who is eagerly trying to retake Intel Corporation (NASDAQ:INTC)’s manufacturing edge in chip fabrication. The firm has lost its crown to Taiwan’s TSMC, and its investors weren’t impressed in August when the firm also announced that it would not only stop paying dividends but also lay off a stunning 15,000 employees to save $10 billion on costs. Letting go of this number of employees often means that a firm might be unable to operate normally, and the combined effect of these developments makes Intel Corporation (NASDAQ:INTC) quite risky. However, the firm is investing heavily in becoming a contract chipmaker for big wigs like NVIDIA, so if it ramps up its new business model, then coupled with up to $8.5 billion CHIPS funding from the US government could allow Intel Corporation (NASDAQ:INTC) to turn a leaf.
Here’s what Intel Corporation (NASDAQ:INTC)’s CEO had to say about its AI products the earnings call:
“In our largest and most profitable business, CCG, we continue to strengthen our position and execute well against our roadmap. The AI PC category is transforming every aspect of the compute experience and Intel is at the forefront of this category creating moment. Intel Core Ultra volume more than doubled sequentially in Q2 and is already powering AI capabilities across more than 300 applications and 500 AI models.
This is an ongoing testament to the strong ecosystem we have nurtured through 40 years of consistent investments. We have now shipped more than 15 million Windows AI PCs since our December launch, multiples more than all of our competitors combined, and we remain on track to ship more than 40 million AI PCs by year end, and over 100 million accumulative by the end of 2025. Lunar Lake, our next-generation AI PC, which achieved production release ahead of schedule in July, will be the next industry-wide catalyst for device refresh. Lunar Lake delivers superior performance at half the power with 50% better graphics performance and 40% more power efficiency versus the prior generation. Lunar Lake delivers 3 times more tops Gen-on-Gen with our enhanced NPU and will be the ultimate AI CPU on the shelf for the holiday cycle.”
11. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Average Analyst Share Price Target Upside: 28%
Average Analyst Share Price Target: $172.04
Number of Hedge Fund Investors in Q1 2024: 124
Advanced Micro Devices, Inc. (NASDAQ:AMD) is a personal and enterprise computing chip designer. It is Intel’s smaller rival, and the only other major player in the x86 personal computing semiconductor industry. Advanced Micro Devices, Inc. (NASDAQ:AMD) also has a robust portfolio of AI data center products, which range from its accelerators to FPGAs and allow management to boast an ‘end to end’ AI platform. Advanced Micro Devices, Inc. (NASDAQ:AMD)’s unique place in the chip industry, where it can easily gobble any market share left by Intel in an industry that will always need chips allows it a wide moat as well. Additionally, it also benefits from being able to compete with NVIDIA in the GPU AI accelerator market as well, and even though NVIDIA’s products are faster, Advanced Micro Devices, Inc. (NASDAQ:AMD) benefits from offering customers an affordable alternative that has been used by big ticket names such as Microsoft and Tesla.
Advanced Micro Devices, Inc. (NASDAQ:AMD)’s management shared details about the firm’s data center offerings during the Q2 2024 investor call. Here is what they said:
“Turning to the segments, data center segment revenue increased 115% year-over-year to a record $2.8 billion, driven by the steep ramp of Instinct MI300 GPU shipments and a strong double-digit percentage increase in EPYC CPU sales. Cloud adoption remains strong as hyperscalers deploy fourth-gen EPYC CPUs to power more of their internal workloads and public instances. We are seeing hyperscalers select EPYC processors to power a larger portion of their applications and workloads, displacing incumbent offerings across their infrastructure with AMD solutions that offer clear performance and efficiency advantages.
The number of AMD-powered cloud instances available from the largest providers has increased 34% from a year ago to more than 900. We are seeing strong pull for these instances with both enterprise and cloud-first businesses. As an example, Netflix and Uber both recently selected fourth-gen EPYC Public Cloud instances as one of the key solutions to power their mission critical customer facing workloads. In the enterprise, sales were increased by a strong double-digit percentage sequentially. We closed multiple large wins in the quarter with financial services, technology, health care, retail, manufacturing, and transportation customers, including Adobe, Boeing, Industrial Light & Magic, Optiver, and Siemens. Importantly, more than one-third of our enterprise server wins in the first half of the year were with businesses deploying EPYC in their data centers for the first time, highlighting our success attracting new customers, while also continuing to expand our footprint with existing customers.”
10. Microchip Technology Incorporated (NASDAQ:MCHP)
Average Analyst Share Price Target Upside: 29%
Average Analyst Share Price Target: $95.52
Number of Hedge Fund Investors in Q1 2024: 35
Microchip Technology Incorporated (NASDAQ:MCHP) sells microcontrollers, signal processors, and other associated products that are used in computing systems such as data centers. It is one of the more unique chip companies since its Total System Solution offers a one stop shop for customers to design and build their embedded systems. These systems are a part of broader data centers, as they allow users to customize their chips for specific use cases. However, even though its product roadmap offers customers a unique edge, Microchip Technology Incorporated (NASDAQ:MCHP) still suffers from the broader cyclical nature of the chip industry. While GPU firms like NVIDIA and AMD have reported robust revenues because of high AI demand, other firms are still struggling with undigested channel inventory, including Microchip Technology Incorporated (NASDAQ:MCHP). This also makes it unsurprising that the firm’s shares are down 11% year to date, despite its exposure to the AI industry.
Aristotle Atlantic Partners mentioned Microchip Technology Incorporated (NASDAQ:MCHP) in its Q2 2024 investor letter. Here is what the firm said:
“Microchip develops, manufactures and sells smart, connected and secure embedded control solutions used by its customers for a wide variety of applications. With over 30 years of technology leadership, Microchip’s broad product portfolio is a Total System Solution for its customers that can provide a large portion of the silicon requirements in their applications. Total System Solution is a combination of hardware, software and services that helps customers increase their revenue, reduce their costs and manage their risks compared to other solutions. Microchip’s synergistic product portfolio empowers disruptive growth trends, including 5G, data centers, sustainability, Internet of Things and edge computing, advanced driver assist systems and autonomous driving, and electric vehicles in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial.
We believe Microchip’s Total System Solution will continue to support industry share gains and margin expansion as end- market demand for industrial and Internet of Things compute needs begins to recover off current lows. Management has accelerated the drawdown of high customer inventory levels by shutting down manufacturing facilities, and current industry data as well as commentary from peers indicates that overall end demand is seeing early signs of improvement. The company has a demonstrated track record of margin expansion, and we expect to see gross margins trough at the current level and, through internal efficiencies and pricing initiatives for its Total System Solution, expand and drive increasing operating margins and higher levels of free cash flow.”
9. GDS Holdings Limited (NASDAQ:GDS)
Average Analyst Share Price Target Upside: 43%
Average Analyst Share Price Target: $14.89
Number of Hedge Fund Investors in Q1 2024: 16
GDS Holdings Limited (NASDAQ:GDS) is a Chinese data center colocation services provider. Jefferies raised its share price target to $16.69 from $16.32 and kept a Buy rating on the shares. This was based on the back of GDS Holdings Limited (NASDAQ:GDS)’s first quarter earnings, which were notable for a growth in its area serviced for data centers which marked a 12% annual growth. Since it’s a colocation company, GDS Holdings Limited (NASDAQ:GDS) is dependent on customer partnerships and the percentage of its area that is being used by operators. Additionally, the stock’s health is also dependent on the broader Chinese economy. China’s domestic AI industry is expected to see significant government interest because of its tensions with the US, the latest of which have seen OpenAI restrict its model APIs to Chinese users. This could see GDS Holdings Limited (NASDAQ:GDS) benefit from local government AI spending as well.
GDS Holdings Limited (NASDAQ:GDS)’s management commented on the key move in rates at its Q1 2024 earnings call where it shared:
“The key to restoring higher growth in China is the move-in rate. Over the past couple of years, we focused our sales efforts on opportunities with faster move-in schedules and reasonable pricing. Even though the market as a whole slowed down, we made good progress with winning this kind of business. The results of our efforts are now starting to become visible in our Gross Additional Area Utilized. In 1Q24, the gross move-in for China was 17,000 square meters, all of which was in Tier 1 markets. It’s the highest since 2020. Going forward, based on contractual commitments in the backlog, we expect gross move-in to continue at these higher levels. From the beginning of 1Q24, we stopped recognizing revenue and deducted 12,000 square meters from Area Utilized for three B-O-T data centers which we plan to transfer to the customer on an accelerated basis.”
8. EQT Corporation (NYSE:EQT)
Average Analyst Share Price Target Upside: 44%
Average Analyst Share Price Target: $44.11
Number of Hedge Fund Investors in Q1 2024: 41
EQT Corporation (NYSE:EQT) is a Pennsylvania based energy company that provides clean burning natural gas for energy production. It is a top Jefferies data center stock pick because of its ability to cleanly power up infrastructure. Since it is a commodities stock, EQT Corporation (NYSE:EQT)’s share performance depends on the volumes that it ships, the broader commodity pricing environment, its ability to keep costs under control, and its capital expenditure. EQT Corporation (NYSE:EQT) is currently looking to lower its value chain costs as it acquired midstream firm Equitrans in March 2024. Since EQT Corporation (NYSE:EQT) is a gas producer, and Equitrans shipped gas, by buying the firm EQT hopes to leverage economies of scale to its advantage in an environment where gas companies have struggled because of low prices. However, the acquisition also increases EQT Corporation (NYSE:EQT) debt and capital expenditure, at a time when its cash flow is struggling.
Legacy Ridge Capital mentioned EQT Corporation (NYSE:EQT) in its Q2 2024 investor letter. Here is what the firm said:
“Lastly, we wrote about Equitrans Midstream (ETRN) in the 2023 mid-year letter, primarily discussing that company’s long and expensive journey completing the Mountain Valley Pipeline and the short-term opportunity we took advantage of. After all the hand wringing and stress with respect to that one project the whole business will end up right where it started, as part of EQT Corp. (EQT). In March, EQT announced they are acquiring each ETRN share for .3504 EQT shares. The transaction should close within the next several weeks.
EQT is the top natural gas producer in the United States with a dominant position in the Appalachian Basin and will become one of the lowest cost gas producers in the US, if not the lowest, after consummating this merger. Our fund is going to exchange the ETRN shares and become EQT owners. The investment checks important boxes for us: 1) a disciplined management team focused on tangible value creation; 2) an ability to generate significant FCF that gets returned to shareholders; 3) exposure to a commodity with strong secular demand trends, which gives us a call-option on higher prices. At only 5% of our assets it will start as a small position for us, but with natural gas prices volatile and back in the low-$2’s we should have ample opportunity to exploit the volatility over time and hopefully make it bigger.”
7. Vertiv Holdings Co (NYSE:VRT)
Average Analyst Share Price Target Upside: 56%
Average Analyst Share Price Target: $105.37
Number of Hedge Fund Investors in Q1 2024: 85
Vertiv Holdings Co (NYSE:VRT) is a rare data center cooling stock on our list. If you read the intro to this piece, you’d understand why cooling might be one of the most underappreciated plays in the data center industry. Its shares are up a strong 54% year to date, helped by the fact that Vertiv Holdings Co (NYSE:VRT)’s second quarter saw it report a strong 57% growth in its organic sales. These sales are new additions to Vertiv Holdings Co (NYSE:VRT)’s customer base, and they indicate the firm’s ability to expand its market share. Another key standout point for the firm is its industry partnerships, with Vertiv Holdings Co (NYSE:VRT) having teamed up with firms like NVIDIA to develop custom cooling solutions. This means that NVIDIA and other firms’ customers can also pitch Vertiv Holdings Co (NYSE:VRT)’s products to their customers and provide the firm a key advantage in a highly evolving AI industry.
ClearBridge Investments mentioned Vertiv Holdings Co (NYSE:VRT) in its Q2 2024 investor letter. Here is what the firm said:
“In the second quarter, we added three new holdings in the sector: electrical product manufacturer Vertiv, building products supplier Builders FirstSource and environmental waste management provider Clean Harbors. The largest new addition of the three, Vertiv, has key offerings in power and thermal management designed to power, cool, deploy, secure and maintain electronics that process, store and transmit data. The company generates the majority of its revenue from the data center end market, which we believe should benefit from continued spending growth supported in part by the rise in power requirements of next- generation AI graphic processing units (GPUs). The company is nicely profitable today though we see room for further margin expansion ahead.”
6. Uniti Group Inc. (NASDAQ:UNIT)
Average Analyst Share Price Target Upside: 58%
Average Analyst Share Price Target: $5.80
Number of Hedge Fund Investors in Q1 2024: 19
Uniti Group Inc. (NASDAQ:UNIT) is a real estate investment trust headquartered in Arkansas. The firm builds and operates communications infrastructure, including fiber networks, which are key for high end data centers, particularly for AI related use cases. Since it’s a fiber connectivity company, Uniti Group Inc. (NASDAQ:UNIT) sits right at the heart of a little known but massive shift taking place in America right now. This is the shift from old copper wires, weighing as much as 800,000 tons to new fiber optic networks which provide Uniti Group Inc. (NASDAQ:UNIT) the ability to profit from new initiatives such as direct to home fiber passing through its properties. However, headwinds in the form of slow telecommunications and consumer spending in the case of an economic downturn persist especially since Uniti Group Inc. (NASDAQ:UNIT) operates primarily in the communications real estate market.
Uniti Group Inc. (NASDAQ:UNIT)’s management shared its thoughts on the shift to fiber during the Q2 2024 earnings call:
“Yes, so as you mentioned, and as Kenny mentioned earlier, this is a fully funded business plan to get us through the combined company plan and cashflow inflection to cashflow positive in 2026. And really, the pieces of that are really just executing on both companies’ plans as they have in place today. Continuing to, at Kinetic, continuing to drive fiber deeper into that business, replacing copper, and hitting those marks and hitting the penetration goals for the fiber product, fiber to the home product at Kinetic is going to be key. Doing that at a cost that’s as projected, and that’s been going really well, as Kenny mentioned, the cost per passing at Kinetic is coming in at $650 per home, which we think is an industry-leading number.
And so continuing to execute on that capital plan, bringing fiber to those homes, and then achieving the penetration rates that Kinetic is showing good progress toward achieving. And then at fiber infrastructure, it’s really continuing to execute on just what we’ve been talking about, lowering capital intensity, delivering more and more lease up higher return type deals. But investment levels in that fiber infrastructure business are relatively consistent with what they are today. And then also for that Windstream business, continuing to drive efficiencies, drive TDM costs out of that business, which is a big part of their plan over the next couple of years, and they’re making great progress with regard to doing that. We saw some nice efficiency gains in their costs this quarter, and the results that were just published today in our 8-K saw some good efficiency gains in that business, so continuing to drive that through.”
5. Super Micro Computer, Inc. (NASDAQ:SMCI)
Average Analyst Share Price Target Upside: 65%
Average Analyst Share Price Target: $1,003.81
Number of Hedge Fund Investors in Q1 2024: 35
Super Micro Computer, Inc. (NASDAQ:SMCI) is a pure play data center hardware stock since it makes and sells equipment such as server racks and workstations. It also benefits from a key partnership with NVIDIA, with the two having teamed up to offer liquid cooling solutions for NVIDIA’s products. Like several data center colocation stocks on our list, Super Micro Computer, Inc. (NASDAQ:SMCI) also benefits from industry ties that see it work not only with NVIDIA but also with AMD and Intel. This means that the firm has a ready, off the shelf portfolio of products that can be easily deployed, which provides Super Micro Computer, Inc. (NASDAQ:SMCI) with a robust product portfolio. At the same time, it also benefits from its key partnership with NVIDIA for the next generation Blackwell GPUs, which are pricier and can offer Super Micro Computer, Inc. (NASDAQ:SMCI) room for additional growth.
However, fund Artisan Partners had an interesting take on Super Micro Computer, Inc. (NASDAQ:SMCI) in its Q2 2024 investor letter where it shared:
“Super Micro Computer manufactures server racks for central processing units and GPUs that have experienced an artificial intelligence-driven uptick in demand from its cloud and enterprise customers. This company has been on our radar for years, and we met with them in our Milwaukee offices in early 2023. However, we don’t consider the stock investable given corporate governance issues. Regarding MicroStrategy, our decision to avoid this company comes down to a lack of conviction in its franchise characteristics. The stock has worked this year due to a rebound in the price of bitcoin. Since 2020, MicroStrategy has been focused on converting its cash and cash equivalent holdings, as well as issuing debt, to fund the purchase of bitcoin, which now makes up most of the company’s value.”
4. Micron Technology Inc (NASDAQ:MU)
Average Analyst Share Price Target Upside: 77%
Average Analyst Share Price Target: $159.85
Number of Hedge Fund Investors in Q1 2024: 115
Micron Technology Inc (NASDAQ:MU) is one of the biggest memory manufacturers in the world. This makes it a key player in the data center and AI markets, since advanced memory like HBM3 is indispensable for advanced AI GPU performance. Along with Korean memory manufacturers SK hynix and Samsung, Micron Technology Inc (NASDAQ:MU) is among the few pure play memory companies in the world, which provides it with key manufacturing advantages needed to operate in the high end of the industry. It is also the only pure play American memory manufacturer, which lends it a key advantage for US memory production particularly in the wake of the CHIPS and Science Act which has earmarked billions of dollars in subsidies for US chip makers. To wit, Micron Technology Inc (NASDAQ:MU) received a whopping $6.1 billion in funding from the Commerce Department in April 2024. However, as the firm depends solely on the memory market, its stock is vulnerable to downswings in the sector that are characteristic of the chip sector’s cyclicality. As an example, Micron Technology Inc (NASDAQ:MU) ‘s shares tumbled by 46% in 2022 when the semiconductor industry was struggling from the demand supply mismatch from the pandemic.
ClearBridge Investments mentioned Micron Technology Inc (NASDAQ:MU) in its Q2 2024 investor letter. Here is what the firm said:
“Quarterly Performance Stock selection in the IT sector proved to be the largest contributor to performance, particularly driven by the strong performance of Micron. The company, which designs, develops, manufactures and sells memory and storage products, continued its strong performance alongside other AI beneficiaries as the anticipated demand for new and additional storage essential for housing and training large language AI models continues to grow.”
3. VNET Group, Inc. (NASDAQ:VNET)
Average Analyst Share Price Target Upside: 92%
Average Analyst Share Price Target: $3.38
Number of Hedge Fund Investors in Q1 2024: 15
VNET Group, Inc. (NASDAQ:VNET) is a Chinese data center hosting firm headquartered in Guangzhou, China. Key to its hypothesis are VNET Group, Inc. (NASDAQ:VNET)’s ability to expand its customer base, increase the area that its facilities service, land new deals, increase utilization rates, and provide existing customers incentives to stick with it. VNET Group, Inc. (NASDAQ:VNET) hopes to grow its revenue by roughly 5% annually this year, and another key to valuing its stock is the US dollar. A weaker dollar, potentially precipitated by lower interest rates, could mean that VNET Group, Inc. (NASDAQ:VNET) ends up generating more dollar income for investors. At the same time, since it’s a Chinese company, the stock has discounted this too, with the P/S ratio of 0.3 being quite low when compared to GDS’s 3.12.
During its Q1 2024 earnings call, VNET Group, Inc. (NASDAQ:VNET)’s management shared key details for its customer base:
“We kick off 2024 with solid operating and financial results. Our wholesale IDC business continued to gain momentum, driven by rapid customer movements. Capacity in serves was 332 megawatts as of the end of first quarter. Capacity utilized by customers increased by 17 megawatts to 236 megawatts in the fourth quarter, primarily driven by increased demand for the customer in [indiscernible] data center. As a result, the utilization rate of wholesale capacity improved to the 71% with the utilization REITs for mature capacity reaching around 95% and ramp up capacity reaching around 34%.
In addition, the capacity under construction was 139 megawatts with pre-commitment reach of around 75% and the capacity health of future development was 557 megawatts. For our retail business, capacity in service was around 52,000 commitments remaining flat compared to last quarter, with utilization rates stable at 64% and with the utilization rate for mature capacity reaching around 73%. MRR for retail cabinets was 8,742 in the fourth quarter compared to 8,759 for last quarter and 8,874 for the same period last year. Moving on our financial performance. We remain the focus on high-quality revenue business, and our efforts continue to generate positive outcomes, our net revenue increased by 5.1% to CNY 1.9 billion, mainly driven by the continued growth of our core business.”
2. Applied Digital Corporation (NASDAQ:APLD)
Average Analyst Share Price Target Upside: 130%
Average Analyst Share Price Target: $9.14
Number of Hedge Fund Investors in Q1 2024: 13
Applied Digital Corporation (NASDAQ:APLD) develops and operates data centers in North America. It operates primarily through two business divisions. One of these caters to cloud computing and the other builds facilities for high performance computing. These allow Applied Digital Corporation (NASDAQ:APLD) to capture all ends of the data center market, and the firm has recently been trimming its operations to shift its business model from being a blockchain company to a data center operator. Applied Digital Corporation (NASDAQ:APLD) also benefits from geography because of its facilities in regions such as North Dakota. These are cooler areas, that could allow it to grow operations in case data center operators turn to nature to manage some of their facilities’ heat generation. Applied Digital Corporation (NASDAQ:APLD) appears confident to operate as much as 900 megawatts of facilities in North Dakota alone.
Applied Digital Corporation (NASDAQ:APLD)’s management commented on this facility during its Q3 2024 earnings call where it shared:
“Furthermore, we made the strategic decision to sell Garden City as it was not compatible with our HPC growth strategy. This divestment enables us to redirect financial and operational resources towards our strategic sites in North Dakota, bolstering our growth initiatives in HPC and cloud service applications.
The decision to sell this facility underscores our commitment to optimizing our asset portfolio while focusing on our core growth areas. As a result of this sale, we will maintain 280 megawatts of data center hosting capacity across our two fully contracted locations in North Dakota. This positions us to be insulated from volatility in the crypto markets leading up to the halving event. Let’s move on to our cloud services business, which provides high performance computing power for AI applications. Despite a lack of significant sequential revenue growth due to delays in clusters entering revenue generation, this segment continues to experience rapid growth, as we advance in fulfilling our existing contracts and exploring new opportunities in our pipeline.
We’ve recently seen positive developments including the enrollment of clients like Together AI and we have exited this quarter with positive momentum. The newly-deployed clusters were turned over to customers late in the quarter, which will provide a significant positive inflection to revenue and EBITDA in our fiscal fourth quarter. Lastly, let me provide an update on our purpose-built HPC data centers. We currently have 400 megawatt of capacity in development across North Dakota, not including the 9 megawatt of capacity we have at our HPC facility in Jamestown to support cloud service customers. During the quarter, we continued to make significant strides in the construction of our 100 megawatt high performance computing facility in Ellendale, North Dakota.”
1. IHS Holding Limited (NYSE:IHS)
Average Analyst Share Price Target Upside: 217%
Average Analyst Share Price Target: $8.40
Number of Hedge Fund Investors in Q1 2024: 10
IHS Holding Limited (NYSE:IHS) is a Britain based communications infrastructure firm with facilities in Africa, Latin America, and the Middle East. Citi last covered its shares in May 2024, when it kept a $3.70 share price target and a Buy rating for the shares. The target was cut from $8 in February due to IHS Holding Limited (NYSE:IHS)’s over exposure to Nigeria and the devaluation of that country’s currency which means that the firm’s revenue to US investors dropped. The bank stressed in February that IHS Holding Limited (NYSE:IHS) needs to formulate a value creation particularly due to the high risk of customer churn. Like APLD, IHS Holding Limited (NYSE:IHS) is also divesting some of its business units to generate cash, and this can lead to as much as $1 billion in proceeds for the firm. During Q1, the firm added 270 new tenants and expanded its communications footprint in the highly lucrative market of Brazil.
As for its value creation plan, here’s what IHS Holding Limited (NYSE:IHS)’s management shared during its Q1 2024 earnings call:
“We continue to look at all options through a value-creation lens with the goal of maximizing the value of our assets and therefore value for shareholders over the near, medium and long term.
There are a number of areas of focus here. One, increasing our operating profitability and substantially reducing our CapEx to increase cash flow generation, which is reflected in our 2024 guidance and implies a notable step-up in adjusted EBITDA margins for the remainder of the year and a significant reduction in CapEx year-over-year. Two, we continue to review our portfolio of markets to determine the right composition for IHS going forward. This is expected to include the disposal of certain markets with a target of raising $500 million to $1 billion over the next 12 months. And three, capital allocation of increased cash flow and disposal proceeds raised, are expected to be primarily derived utilized to reduce debt. However, we will also consider deploying excess proceeds through share buyback and or introducing a dividend policy.
To be clear, these initial targets do not rule out further initiatives to continue increasing shareholder value, which we continue to assess in parallel. While it’s only been two months, we’re off to a good start, with significant work already completed by us and our advisors to identify and analyze these various opportunities. We will continue providing updates as we progress.”
IHS leads the pack when comes to top analyst data center stocks. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than IHS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None.
