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 L3Harris Technologies, Inc. (NYSE:LHX) 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 military jetfighter against a deep blue sky with the sun behind it.
L3Harris Technologies, Inc. (NYSE:LHX)
Short % of Shares Outstanding: 0.66%
Number of Hedge Fund Holders: 40
Forward Price to Earnings Ratio as of August 28: 17.64
L3Harris Technologies, Inc. (NYSE:LHX), operates as an advanced technology company that sells mission systems, space and airborne systems, communication systems, and much more. It operates in the aerospace and defense industry selling its products to government agencies and commercial customers.
L3Harris Technologies, Inc. (NYSE:LHX) already has a strong competitive edge with market-leading capabilities in air, land, sea, and cyber security technologies. In 2023, the company acquired Aerojet Rocketdyne, a leader in aerospace, defense, and rocket propulsion, thereby adding space technologies to its portfolio.
Another strategic edge that sets it apart from the broader market and on track for long-term growth is its ability to maintain a strong order backlog while winning new government contracts simultaneously. During its most recent quarter, Q2 2024, L3Harris Technologies, Inc. (NYSE:LHX) landed new contracts worth $5 billion and increased its order backlog to more than $32 billion.
A strong order backlog can be a burden if management cannot drive revenue through it. L3Harris Technologies, Inc. (NYSE:LHX) has done well in keeping its top-line needle busy. During Q2 the company grew its revenue to $5.3 billion increasing 13% year-over-year on the back of Communication and Aerojet Rocketdyne segments.
The company’s profit margins are also growing, its operating income improved 19% during the year to reach $400 million, while margins grew 50 base points.
LHX is undervalued at current levels. It is trading at 18 times its forward earnings, a 10% discount to its sector. Moreover, its earnings are expected to grow 5.50% to reach $13.04. It was held by 40 hedge funds in Q2 2024, with total stakes worth $1.20 billion. Diamond Hill Capital is the top share holder of the company with a position worth $334.4.
Diamond Hill Mid Cap Strategy made the following comment about L3Harris Technologies, Inc. (NYSE:LHX) in its Q3 2023 investor letter:
“L3Harris Technologies, Inc. (NYSE:LHX) is a defense contractor focused primarily on communications, surveillance and electronic warfare. We anticipate the US’s defense budget will be better than expected over the next few years as the Defense Department focuses on preparing for peer-level threats — an area in which LHX’s capabilities fit nicely. We believe there is room for improvement in recent execution — particularly at recently acquired Aerojet Rocketdyne — and we think LHX’s new management team is well-qualified to improve results. We accordingly capitalized on a recent share-price decline to initiate a position at what we consider a compelling valuation.”
Overall LHX ranks 1st on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of LHX 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.
