In this article, we will look at the 16 Most Undervalued Tech Stocks To Buy Now.
Artificial Intelligence and Data Centers
Artificial intelligence is the hot center of the technology industry, especially with the introduction of Large Language Models (LLMs) like ChatGPT and Gemini. The AI revolution, which is underway, has affected the semiconductor market and we have seen chipmaker stocks skyrocket with it. However, semiconductor stocks are not the only beneficiaries, data centers also benefit greatly from the surge in AI.
According to Future Market Intelligence, the data center market is estimated at around $30.4 billion during 2024, it is expected to grow at a compound annual growth rate of 14.4% to reach $117.24 billion by 2034. Data centers were in demand before the AI boom as well, with data from Jefferies showing their demand rising 10% to 20% for the last 15 years before AI. However, AI accelerated the market to around 30% in just two years.
The capabilities of data centers and artificial intelligence are revolutionary, but that doesn’t overshadow the energy consumption concerns that come with them. As highlighted by Goldman Sachs Research, data centers consume around 1% to 2% of overall power worldwide, which seems manageable at first. However, they are likely to rise from 3% to 4% in just a decade.
We recently covered 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts. It talks about the alarming power consumption challenge that comes with AI and data centers. Here’s an excerpt from the article:
“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.”
While the expected power consumption figures are concerning, they also point towards a new market opportunity to introduce “sustainable AI factories”. Tim Rosenfield co-founder and co-CEO of Sustainable Metal Cloud, has introduced HyperCubes, which reduces energy consumption by up to 50%.
HyperCubes contains servers fitted with Nvidia processors, submerged in synthetic oil called polyalphaolefin. Synthetic oil draws heat from the processors more efficiently than air cooling systems typically used in most data centers.
These cubes are being used in Singapore and Australia. Tim Rosenfield mentioned that the technology enables high-density hosting for GPUs and that too sustainably with low energy consumption. The technology is also said to be 28% cheaper to install as compared to traditional cooling systems and is designed to be used in any data center around the globe.
The co-founder of SMC further mentioned that countries like Singapore are looking to push the “green” button for data centers and AI ambitions and the country has committed more than $379.7 million to the cause.
Countries like Singapore, where SMC is headquartered, are also looking to mitigate the hefty energy consumption by pushing for “green” data centers to support its AI ambitions where the country has committed more than 500 million Singapore dollars ($379.7 million). The company has also recently received funding from Singapore state investor Temasek-backed ST Telemedia Global Data Centers, one of Asia’s largest data center operators.
Now that we have talked about the recent developments in the tech sector. Let’s take a look at the 16 most undervalued tech stocks to buy now.
An engineer offering a demonstration of the ultra-low power FPGA technology.
Our Methodology
To curate the list of 16 most undervalued tech stocks to buy now we first identified 50 undervalued tech stocks that were most widely held by hedge funds. We looked at stocks that were trading under 20 times their forward earnings (the market’s P/E multiple is ~23x as of August 28, according to WSJ data), with earnings expected to grow during the year. Once we had an aggregated list of 50 undervalued tech stocks, we ranked them by short percentage of shares outstanding as of 8/15/2024, sourced from Yahoo Finance.
The list is ranked in descending order of short percentage of shares outstanding.
Why do we care about what hedge funds do? 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).
16 Most Undervalued Tech Stocks To Buy Now
16. Alibaba Group Holding Limited (NYSE:BABA)
Short % of Shares Outstanding: 2.37%
Number of Hedge Fund Holders: 91
Forward Price to Earnings Ratio as of August 28: 9.21
Alibaba Group Holding Limited (NYSE:BABA) is a leader when it comes to the Chinese technology sector. It provides technology infrastructure and marketing reach to merchants through its e-commerce platform. Moreover, the company also provides cloud services and other technology solutions to its customers.
As of late, the Chinese tech giant has been facing some difficulties due to its huge market capitalization of $187.88 billion and increasing competition in the market. However, management knows how to regain the former glory. Alibaba Group Holding Limited (NYSE:BABA) has been betting heavily on Artificial Intelligence across all its business segments be it e-commerce or cloud computing services.
It has already been using AI features with its 24/7 chatbot services, recently management introduced AI to provide personalized recommendations to drive better sales through targeted marketing. Its cloud business is also witnessing improvement thanks to AI-driven products.
During the Fiscal Q1 2025, the overall revenue of the company grew 6% year-over-year, driven by double-digit growth in its cloud business. Most notably, its AI-related product revenue grew by triple digits, 155%. Management has shown its continued interest in investing in AI infrastructure and believes it can increase its cloud adoption and help maintain its market leadership.
In addition, Alibaba Group Holding Limited (NYSE:BABA) is also developing its Qwen 2.0 series of large language models through open-source development. Management believes that open-source development has significantly improved the model and has enhanced its safety features and ability to support more than 27 languages. The number of users using the company’s cloud AI platform has increased by 200% during the quarter, indicating continued growth.
BABA is cheap at current levels, it is trading at only 9 times its forward earnings, a 42% discount to its sector. Moreover, its earnings are also expected to rise by 2.70% during the year to reach $8.81.
It was held by 91 hedge funds in Q2 2024, with total stakes worth $3.81 billion. Appaloosa Management LP is the top share holder of the company with a position worth $756 million.
O’keefe Stevens Advisory stated the following regarding Alibaba Group Holding Limited (NYSE:BABA) in its Q2 2024 investor letter:
“We initiated two new positions during the quarter: Alibaba Group Holding Limited (NYSE:BABA) and Perrigo (PRGO). Both have seen their stocks decline over 70%+ from their all-time highs.
Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025.
It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23…” (Click here to read the full text)
15. International Business Machines Corporation (NYSE:IBM)
Short % of Shares Outstanding: 2.24%
Number of Hedge Fund Holders: 54
Forward Price to Earnings Ratio as of August 28: 19.58
International Business Machines Corporation (NYSE:IBM) is a pioneer technology company that provides integrated solutions and services globally through its Consulting, Software, Infrastructure, and Financing Segments.
Its Software segment is also involved in hybrid clouds, AI platform integration, and transformation for enterprise use. Whereas, its consulting segment focuses on technology integration, operation integration, and strategy.
International Business Machines Corporation (NYSE:IBM) is leveraging its years of experience and AI enterprise to drive record revenues. CEO, Arvind Krishna was positive regarding the company’s second-quarter results and mentioned that revenue growth and free cash flow generated during the quarter exceeded their expectations.
Revenue grew 4% year-over-year to reach $15.8 billion and the year-to-date free cash flow amounted to around $4.5 billion. International Business Machines Corporation (NYSE:IBM) witnessed a strong performance in its software and infrastructure segments growing 8% and 3%, respectively. Strong performance within these segments was a testimony to the continued success of its hybrid cloud and AI strategy.
Management has infused AI across all its businesses and tools and is leveraging its automation products such as Apptio and Watson Orchestrate to drive growth. The company is in the process of acquiring HashiCorp, for its automation cloud infrastructure which is anticipated to boost its software segment substantially.
As a result of a strong quarter with growth across the board, management has raised its free cash flow guidance to over $12 billion for the year. CEO, Arvind Krishna believes that strong cash generation will allow the company to invest more in innovation to return more profits for the company and shareholders.
IBM is cheap at current levels, it is trading at 19 times its forward earnings, which is an 18% discount to its sector. Moreover, its earnings are also expected to improve by 5.70% to reach $10.17 during the year.
The stock was held by 54 hedge funds with stakes worth $837.6 million. Citadel Investment Group is the top share holder of the company with a position worth $383 million.
Diamond Hill Capital Long-Short Fund stated the following regarding International Business Machines Corporation (NYSE:IBM) in its first quarter 2024 investor letter:
“Among our bottom Q1 contributors short positions in Dick’s Sporting Goods, International Business Machines Corporation (NYSE:IBM) and Palomar Holdings. Though we believe the quality and durability of IBM’s free cash flow-generating capabilities remain questionable, investor sentiment has improved amid optimism for the company’s still-nascent AI product suite.”
14. Electronic Arts Inc. (NASDAQ:EA)
Short % of Shares Outstanding: 2.23%
Number of Hedge Fund Holders: 40
Forward Price to Earnings Ratio as of August 28: 19.52
Electronic Arts Inc. (NASDAQ:EA) is one of the top video game developers according to market capitalization. The company develops and distributes video games for various platforms, including consoles, PCs, and mobile phones. It generates revenue by selling its products (games and related software) and through service, which is recurring revenue and includes ongoing services such as subscriptions, downloadable content, and other gameplay transactions.
Some of the popular video game series by Electronic Arts Inc. (NASDAQ:EA) include EA SPORTS FC, Madden NFL, Battlefield, Apex Legends, The Sims, and Need for Speed. The company has one of the largest portfolios of games, with a huge fan following and engaging online communities, thereby giving it a competitive edge over its competitors.
The past 10-year performance of Electronic Arts Inc. (NASDAQ:EA) advocates for its profitability and robust fundamentals. It has been able to grow its top line by 7% and bottom line by 25% while improving its levered free cash flow by 6%.
Over the past 12 months, the company has achieved $7.1 billion in net bookings, out of which 75% was recurring revenue originating from Live Services bookings. The most recent quarter, FQ1 2025, marked a successful start to the fiscal year mainly on the back of double-digit growth in EA SPORTS Madden NFL bookings and record bookings for EA SPORTS FC Mobile.
The company also surpassed its net booking guidance for the quarter to reach $1.26 billion in net bookings. Although the net revenue took a hit and was down 14% year-over-year and operating expenses were up 2%, it was still able to grow its free cash flow by 3% year-over-year to reach $1.86 billion.
Looking ahead at the FQ2 guidance, management remains confident for an action-packed quarter with the upcoming Madden NFL 25 and FC 25. It has raised its net booking guidance to $1.95 billion to $2.05 billion, a 7% and 13% increase year-over-year.
Talking about valuation, EA is trading at 19 times its forward earnings. Moreover, analysts expect its earnings to grow by 10% during the year to reach $7.61 making it an undervalued tech stock to buy.
It is also popular among hedge funds and was held by 40 hedge funds during Q2 2024, with total stakes worth $819.8 million. D E Shaw is the top shareholder of EA, with a position worth $193.7 million.
