27:31
3 Hidden AI Revolution Stocks to Buy Now
Zacks Investment Research
Overview
This video explores "hidden" Artificial Intelligence (AI) stocks that are benefiting from the AI revolution without being the primary AI players like Nvidia. The host argues that the AI spending boom is trickling down to companies in traditional industries that are involved in building AI infrastructure or incorporating AI into their operations. These "old economy" companies, often overlooked, are now showing significant revenue and earnings growth, presenting potentially attractive investment opportunities with more reasonable valuations compared to the leading AI tech giants. The discussion highlights specific examples and their recent stock performance, emphasizing the importance of looking beyond the obvious names in the AI space.
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Chapters
- The definition of an 'AI stock' is broad, encompassing not just chipmakers but also companies involved in data centers, cooling, installation, and AI software integration.
- Significant global spending on AI infrastructure is expected, creating a ripple effect throughout various industries.
- The focus is on 'hidden' AI stocks where AI is a growing, but not the sole, revenue driver, offering exposure to AI growth without the extreme valuations of primary AI companies.
- Stock charts show that many AI-related stocks are hitting new highs, indicating that the AI spending boom is impacting a wider range of companies.
Understanding the diverse ways companies benefit from AI spending helps investors identify opportunities beyond the most prominent tech giants, potentially leading to more diversified and undervalued portfolios.
The speaker contrasts obvious AI stocks like Nvidia with companies that might be building data centers or providing equipment for them, illustrating the broad reach of AI investment.
- BorgWarner (BWA), an auto parts manufacturer, is developing turbines for data centers, a new revenue stream contributing to its stock's recent surge.
- Caterpillar (CAT), a heavy equipment manufacturer, is benefiting from the demand for machinery used in building data centers and related infrastructure.
- United Rentals (URI) provides essential equipment for construction projects, including those for data centers and electrical infrastructure, making it a beneficiary of the AI build-out.
- These 'old economy' companies are experiencing significant year-to-date and one-year stock gains, driven by AI-related infrastructure development.
These examples demonstrate how established companies in non-tech sectors can become indirect beneficiaries of the AI boom, offering investors a way to participate in AI growth through more familiar business models.
Caterpillar's stock hitting new all-time highs due to the demand for its equipment in constructing AI data centers.
- Hewlett Packard Enterprise (HPE) is involved in the internal build-out of data centers, a crucial part of AI infrastructure.
- Despite its role, HPE was largely ignored by the market until recently, trading at lower valuations.
- HPE has experienced a significant stock breakout, with substantial year-to-date and one-year gains, driven by a recent earnings beat and raise.
- The company's business is shifting towards enterprise solutions and AI, with the CEO expecting continued demand into 2027.
HPE's story highlights how even companies perceived as 'boring' or overlooked can become significant players in emerging technological trends, offering a potentially undervalued growth opportunity.
HPE's stock price soaring after a recent earnings report, with earnings consensus estimates showing a near-vertical climb, indicating a significant shift in market perception.
- BorgWarner shows attractive value metrics with a low P/E ratio (14) and price-to-sales (1.04), despite expected revenue decline in autos.
- Caterpillar has strong earnings growth projections (29% this year, 24% next year) but a higher forward P/E (38), reflecting its cyclical nature and current demand.
- United Rentals offers a balanced profile with moderate P/E (22) and steady earnings growth projections, benefiting from infrastructure and manufacturing build-outs.
- HPE presents a compelling case with a low P/E (14.2) and PEG ratio (0.44) alongside high expected earnings growth (75.8%), making it appear undervalued despite recent gains.
- Investors should consider potential pullbacks in the market, which could offer better entry points for these AI-related stocks.
Analyzing valuations helps investors determine if the current stock prices reflect the growth potential and if there is still room for appreciation, especially when compared to the high multiples of pure-play AI companies.
BorgWarner's P/E ratio of 14 and price-to-sales of 1.04 are highlighted as indicators of its value investment appeal.
Key takeaways
- The AI revolution is creating investment opportunities across a wide spectrum of industries, not just in direct AI technology providers.
- Companies in traditional sectors like manufacturing and equipment rental are experiencing significant growth due to the infrastructure build-out required for AI.
- Identifying 'hidden' AI stocks can lead to investments in companies with strong growth potential and more reasonable valuations compared to market leaders.
- Recent stock performance and insider buying can be indicators of underlying strength and optimism, even for companies at all-time highs.
- While AI stocks are surging, potential market pullbacks could present opportunities to enter these positions at more attractive prices.
- Valuation metrics such as P/E, price-to-sales, and PEG ratios are crucial for assessing the investment attractiveness of these AI-benefiting companies.
- Look beyond the obvious tech giants to find companies that are indirectly but significantly benefiting from the massive AI spending.
Key terms
AI StocksHidden AI StocksAI InfrastructureData CentersHyperscalersOld Economy CompaniesValuationsP/E RatioPEG RatioRevenue GrowthEarnings Growth
Test your understanding
- How does the AI spending boom create opportunities for companies outside the traditional tech sector?
- What are the key characteristics that define a 'hidden' AI stock, as described in the video?
- Why are companies like Caterpillar and United Rentals considered beneficiaries of the AI revolution, despite their core businesses?
- How can investors use valuation metrics to assess the attractiveness of 'hidden' AI stocks compared to more obvious AI plays?
- What is the significance of looking at insider buying when considering stocks that are trading at or near all-time highs?