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 TD SYNNEX Corporation (NYSE:SNX) 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 customer happily using their mobile device in a busy urban setting.
TD SYNNEX Corporation (NYSE:SNX)
Short % of Shares Outstanding: 2.08%
Number of Hedge Fund Holders: 46
Forward Price to Earnings Ratio as of August 28: 10.39
TD SYNNEX Corporation (NYSE:SNX) is a major information technology distribution company, which was formed by the merger of Synnex and Tech Data in 2021. It sells a wide range of products and services including technology products, data center solutions, assembly and integration services, cloud services, and much more.
It operates through Cloud Services, Professional Services, Supply Chain Services, and Financial Services segments. The IT distribution services is a high-growth business model and the margins improve by distributing more software and services, TD SYNNEX Corporation (NYSE:SNX) has done well in capturing the market. It has more than 200,000 products and solutions, 2,500 plus OEMs and vendor partners, and more than 150,000 customers. It is an investor-favorite stock and was held by 46 hedge funds in Q2 2024, with total stakes worth $1.52 billion. Brave Warrior Capital is the top shareholder of SNX with a position worth $383.3 million.
The second quarter of 2024 was a testimony to the company’s profitability. It was able to grow its gross billings by $19.3 billion by 3% year-over-year, stemming from growth in all business areas, especially its Strategic Technologies segment. The Strategic Technologies segment, which focuses on next-generation technologies including cloud, cyber security, IoT, AI, and Data accounted for 25% of the gross billings.
Although the total revenue of the company was down 4% year-over-year, TD SYNNEX Corporation (NYSE:SNX) was still able to improve its gross margins by 27 base points. Management believes that the market has stabilized and remains confident to improve their revenues and gross billing prospects during the remaining half of fiscal 2024.
The prospects of growth are bright, as the company has well-positioned itself to leverage the growing AI market. TD SYNNEX Corporation (NYSE:SNX) has entered into vendor partnerships and launched IBM’s Watson Gold 100 Program to accelerate AI opportunities for partners. Moreover, the company has also been named a design partner for NVIDIA’s HGX product line.
Looking at the FQ3 guidance, management expects revenue between $13.3 – $14.9 billion and gross billings to reach $20.1 billion. The increased guidance is fueled by its PC refresh cycle, customer investment in data center and cloud deployments, and its increased investment in AI ventures.
SNX is undervalued at current levels. It is trading at only 10 times its forward earnings, a 57% discount to its sector, and its earnings are also expected to grow by 4.40% during the year to reach $11.8.
FPA Queens Road Small Cap Value Fund stated the following regarding TD SYNNEX Corporation (NYSE:SNX) in its Q2 2024 investor letter:
“TD SYNNEX Corporation (NYSE:SNX) is an information technology (IT) distributor formed through the merger of Tech Data and Synnex in 2021. IT distribution is an attractive business model that grows at a GDP+ rate with the opportunity for margin improvement through selling more software and services, although with some cyclicality. The IT distributors have historically traded cheaply, usually at less than 10x earnings.22 We have owned Synnex since 2012 and Tech Data from 2010 until it was taken private by Apollo in 2020. SNX has performed well on the back of a strengthening IT market, particularly for PCs.”
Overall SNX ranks 13th on our list of the most undervalued tech stocks to buy now. While we acknowledge the potential of SNX 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.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.
