We recently compiled a list of the 16 Most Undervalued Tech Stocks To Buy Now. In this article, we are going to take a look at where Block, Inc. (NYSE:SQ) stands against the other undervalued tech stocks.

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.

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.

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).

Block, Inc. (NYSE:SQ)

Short % of Shares Outstanding: 1.73%

Number of Hedge Fund Holders: 59

Forward Price to Earnings Ratio as of August 28: 18.83

Block, Inc. (NYSE:SQ) is a financial services and digital payment company, that develops payment platforms for small and medium business owners allowing them to digitally manage their sales and finance operations.

It offers Square and Cash App. The Square app allows businesses to manage retail, appointments, Points of Sale, card payments, and much more digitally through their computers. Moreover, the Cash App allows peer-to-peer transactions such as payments, bitcoins, and investment brokerage.

The interconnectedness of Block, Inc.’s (NYSE:SQ) business model gives it a competitive edge over the market. Both business segments make their customers dependent on the platform thereby contributing to constant revenue growth. Moreover, as a result of its services to a large number of businesses, the company has a bank of data that also gives it a strategic edge to grow its business subsequently.

SQ is an investor’s favorite stock. It was held by 59 hedge funds in Q2 2024, with total stakes worth $2.68 billion. ARK Investment Management is the top share holder of the company with a position worth $534.7 million.

Both the business segments proved their profitability during the fiscal second quarter of 2024. The Square segment gross profits were up 15% year-over-year at $923 million and the Cash App profit amounted to $1.3 billion improving 23% year-over-year. As a result, the combined profit reached $2.23 billion indicating a robust 22% growth when compared to the previous year.

Management has set its bar high in terms of growth. It stays committed to the “Rule of 40”, which entails that the sum of a company’s annual revenue growth and its profit margins should be equal to or greater than 40%.

As of the second quarter, Block, Inc. (NYSE:SQ) improved its adjusted EBITDA to $759 million, increasing more than twice year-over-year. Moreover, its twelve-month trailing free cash flow in June was recorded to be $399 million, twice when compared to the previous year,

Block, Inc. (NYSE:SQ) strong cash generation capability combined with its ecosystem of growth from both segments offers significant room for growth. The company also presents an attractive entry point. It is trading at 19 times its forward earnings, while the market average sits at 24. Moreover, its earnings are also expected to grow by 100% to reach $3.6 during the year. Thereby making it an undervalued tech stock to buy now.

Baron FinTech Fund stated the following regarding Block, Inc. (NYSE:SQ) in its Q2 2024 investor letter:

“Block, Inc. (NYSE:SQ) provides point-of-sale technology to small businesses and operates the Cash App ecosystem of financial services for individuals. Shares gave back gains from earlier this year despite reporting strong quarterly results and raising full-year guidance. In the first quarter, gross profit grew 22% and EBITDA grew 91%, both exceeding Street expectations. Given the strong start to the year, second-quarter guidance of 16% to 17% gross profit growth may have disappointed some investors. Management remains committed to a “Rule of 40” investment framework in 2026 with at least mid-teens gross profit growth and a mid-20% operating margin. We continue to own the stock due to Block’s long runway for growth, durable competitive advantages, and innovative product offering.”

Overall SQ ranks 10th on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of SQ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.