Artificial intelligence and data centers go hand-in-hand these days. As companies generate more data and rely on complex algorithms, they need robust infrastructure to store and process all that information efficiently. However, pure-play data center stocks with AI exposure are tricky to find.
The data center industry has seen tremendous consolidation lately. Many promising players were acquired by tech giants over the last decade. Big tech companies now own massive data centers to support their AI needs. So, good luck trying to find a pure-play data center stock among the tech conglomerates.
Meanwhile, smaller independent data center operators struggle to compete with the tech titans’ scale and deep pockets. But that doesn’t mean there are no viable AI data center plays left. With data generation and AI workloads still rising exponentially, some smaller data center stocks could post explosive growth ahead. Here are three such stocks to consider.
Innodata (INOD)
If you’re looking for a pure play on the AI data annotation boom, Innodata (NASDAQ:INOD) deserves a hard look. This global data engineering company specializes in providing labeled data to power modern AI models. After a short seller report in February, INOD stock plunged.
The core allegation? Innodata’s services and AI capabilities are exaggerated. However, similar doubts plague many emerging AI players. I recall when Super Micro (NASDAQ:SMCI) faced short seller scrutiny in January 2023, yet shares have rocketed nearly 1,000% since.
I believe Innodata’s criticisms are overstated. This company has inked deals with four of the five mega tech firms globally. Plus, major institutional investors own sizable positions. I think they’ve vetted Innodata thoroughly. With the ongoing confidence of smart money investors, it’s only a matter of time until retail investors climb aboard.
Does this mean Innodata’s AI tech is unassailable? No nascent player’s technology is. But I highly doubt Innodata is misrepresenting itself outside of industry norms, or making egregious claims. While the short report highlights the company’s trailing 12-month losses, it omits Innodata’s two consecutive profitable quarters.
In my view, the excessive worries around Innodata seem profoundly overblown. I expect this beaten-down stock to regain its footing as more quarterly reports demonstrate the durability of its data and AI businesses over the long-haul. Patience could pay off big time with INOD stock.
Data Storage Corp. (DTST)
Data Storage Corp. (NASDAQ:DTST) has been on my radar for a while, and my conviction continues building! Even at slightly above $5 (still a penny stock due to the company’s small market cap), I firmly believe this overlooked gem’s surge is just beginning.
Yes, conventional valuation metrics might initially make Data Storage Corp. appear slightly overvalued. But given its explosive growth trajectory and future potential, that premium looks like a bargain to me. Data Storage Corp. still trades far below larger data center players, with ample room for growth ahead.
The company missed revenue estimates by a mere 1.76% in Q4, with sales coming in at $6.19 million versus the $6.3 million analysts expected. However, the company did achieve full-year profitability and is guiding for significant growth in 2024.
With metrics like these, I believe it’s only a matter of time before institutional and retail investors pile in to drive DTST stock to new heights. This high-flying data center disruptor remains an incredible value story in my book.
Applied Digital (APLD)
Most see Applied Digital (NASDAQ:APLD) as just a crypto mining company, and recoil. However, I believe that gut reaction misjudges this innovative data center operator.
Sure, a sizable chunk of Applied Digital’s income currently stems from furnishing blockchain colocation to miners. However, the company is quickly expanding into high-performance computing and AI cloud services. These are fast-growth sectors with big demand for processing power. The company’s state-of-the-art data centers are primed to reap the benefits.
What truly excites me about this company is the imminent Bitcoin (BTC-USD) halving event. In just weeks, the reward for mining and validating Bitcoin transactions will be sliced in half. To maintain output, miners need to practically double computing. Expect Applied Digital’s facilities to burst with customers adding rigs.
I’m highly bullish on Applied Digital’s long-term prospects. The company has guided to a staggering $500 million revenue run rate and $250 million annualized adjusted EBITDA by fiscal 2024 year-end. With reservations from AI and crypto miners filling fast, multi-bagger returns for APLD stock seem possible over the next 12 months.
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On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.