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 Fidelity National Information Services, Inc. (NYSE:FIS) 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).
A financial analyst monitoring the stock market, with multiple screens of varying sizes and colors.
Fidelity National Information Services, Inc. (NYSE:FIS)
Short % of Shares Outstanding: 1.91%
Number of Hedge Fund Holders: 59
Forward Price to Earnings Ratio as of August 28: 15.90
Fidelity National Information Services, Inc. (NYSE:FIS) operates in the financial technology industry more commonly known as the Fintech industry. It provides a range of technologies for financial institutions and businesses to enhance their digital transformation. It operates through three main segments including Banking Solutions, Capital Market Solutions, and Corporate and Other Solutions.
The Banking Solutions segment provides complete banking systems and related applications including mobile and online banking platforms. Whereas, the Capital Market Solution provides trading and asset management tools that facilitate lending and loan syndication services.
Fidelity National Information Services, Inc. (NYSE:FIS) has remained profitable over the past decade, however, the growth has remained in the single digits. Over the past 10 years, its revenue has grown by 5% and net income by 3%. Therefore, management has sensed the urgency to reposition the company to a more sustainable growth trajectory.
To accomplish this, the company is now focusing on higher-value software-based solutions that meet clients’ needs while providing Fidelity National Information Services, Inc. (NYSE:FIS) a multiyear recurring revenue. As a result, during fiscal 2023, the company reduced its cost by more than $550 million and expects a total cost saving of $1 billion by 2024. Leveraging, its recurring revenue management was also able to exceed its 2023 free cash flow target by more than $500 million.
Investors believe that the company’s client-centric approach topped with its brand recognition offers significant room for growth. It was held by 59 hedge funds during Q2 2024, with stakes amounting to $2.36 billion. Lyrical Asset Management is the top share holder of the company with a position worth $326.46 million.
Fidelity National Information Services, Inc. (NYSE:FIS) is undervalued at current levels and has proven its profitability in its most recent quarter results. It is trading at 16 times its forward earnings. Its earnings are expected to grow by 51% during the year to reach $5.1.
During the fiscal second quarter of 2024, the cost-saving efforts and a better revenue mix continued to deliver growth for the company. Its adjusted revenue grew 4% year-over-year to reach $2.5 billion delivering EBITDA margins of 40.1%, up 110 base points from the previous year.
Management has improved its full-year guidance after gaining some confidence from its cost-saving efforts. It now expects revenue between $10.12 – $10.17 billion, with adjusted EBITDA margins at 40.7%, indicating a modest increase from the previous year.
Invesco Growth and Income Fund stated the following regarding Fidelity National Information Services, Inc. (NYSE:FIS) in its Q2 2024 investor letter:
“Given that many equity indexes reached record highs, valuation opportunities were limited and portfolio activity was somewhat muted. We purchased new holdings in financials, health care and IT. Fidelity National Information Services, Inc. (NYSE:FIS): The company is a leading global provider of financial services technology solutions for financial institutions, businesses and developers. The company has lagged its peers in recent years due to numerous acquisitions that increased its debt. However, a new CEO and CFO have made efforts to right size the firm and refocus on its core banking and capital market businesses by selling a partial stake in a recent acquisition. As a result, we believe the company should be able to increase selling opportunities, grow earnings and potentially return capital to shareholders.”
Overall FIS ranks 12th on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of FIS 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.