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 Johnson Controls International plc (NYSE:JCI) 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 team of workers wearing white hardhani and safety goggles assembling a complex HVAC system.
Johnson Controls International plc (NYSE:JCI)
Short % of Shares Outstanding: 1.27%
Number of Hedge Fund Holders: 46
Forward Price to Earnings Ratio as of August 28: 19.44
Johnson Controls International plc (NYSE:JCI) provides technology solutions for buildings, energy products, integrated infrastructure, and next-generation transportation systems. Its portfolio of technology products includes fire, security, HVAC, power solutions, and energy storage that serves large-scale commercial and small-scale home setups.
It has operations in North America, Europe, and Asia, and is in contract to provide its technologies for various government and commercial facilities.
Johnson Controls International plc (NYSE:JCI) has been away from investor eyes due to its sluggish performance in the past. Over the past 5 years, the company grew its revenue by only 2.44% and dropped its bottom line by around 23%.
However, the stock has popped up again as a prominent activist Elliott Investment Management built a position worth more than $1 billion in the company. Since the start of 2024, the stock has gained more than 24% and investors are buying with expectations that Elliott has plans to boost the share price. Moreover, JCI is also popular among hedge funds and was held by 46 hedge funds, with total stakes worth $2.52 billion. Fisher Asset Management is the top share holder of the company with a position worth $982.8 million.
On July 31, Johnson Controls International plc (NYSE:JCI) announced its FQ3 2024 earnings results with margin expansion exceeding the company’s expectations. The company delivered organic sales growth of 3% in line with its guidance and delivered 150 base point expansion to its segment margins to 17.9%, exceeding expectations of 17%.
Management has indicated its strategic ambition of becoming a pure-play data center solutions company. It has been making significant investments to build technologies for data center solutions and has built a leading market position in North America. The company grew its order backlog by 10% during the quarter giving confidence to its investors for long-term growth.
Management faces some pressure from its ongoing business transformation concerning the divestitures of its Residential and Light Commercial HVAC business and Air Distribution Technologies business. However, regardless, the company generated over $500 million in free cash flow and also witnessed a 9% growth in its service revenue.
Moving ahead, management expects 7% sales growth in Q4, with improved EBITDA margins at 19% and diluted EPS of $1.23 to $1.26. JCI is undervalued at current levels, making it an attractive investment opportunity. It is trading at 19 times its forward earnings, while the broader market average sits at 24. Moreover, its earnings are also expected to grow by 5% during the year to reach $3.67.
Diamond Hill Capital Mid Cap Strategy stated the following regarding Johnson Controls International plc (NYSE:JCI) in its first quarter 2024 investor letter:
“Though valuations have increased, we continue identifying high-quality companies we believe the market is overlooking. We accordingly initiated four new positions in Q1: Generac Holdings, Diamondback Energy (FANG), Johnson Controls International plc (NYSE:JCI) and Humana. We initiated a position in Johnson Controls (JCI), a leading provider of HVAC, security and fire detection/suppression and building management systems as we believe the company is well-positioned to benefit from the secular trend toward smart buildings and a shift to high-margin services. While JCI has not executed particularly well recently, we believe the market has overreacted to these issues while also underappreciating the potential magnitude of the aforementioned secular tailwinds. We accordingly capitalized on the opportunity to establish a position at a steep discount to JCI’s HVAC peers and our estimate of intrinsic value.”
Overall JCI ranks 5th on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of JCI 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.
