Investors looking tomorrow’s winners should pay attention to the development of the world’s technology infrastructure. Companies are going all-in on artificial intelligence (AI), and it’s leading to a massive buildout of data center infrastructure.
The data center construction market is expected to increase from $240 billion in 2024 to $456 billion by 2030, according to Grand View Research. Another estimate from Statista finds that the AI server market could increase roughly 10-fold to $430 billion by 2033.
Fortunately, there are companies you can invest in that offer direct exposure to these markets. Here are two stocks to profit from this opportunity.
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1. Applied Digital
Applied Digital (APLD -4.70%) is a relatively small company with just $221 million in trailing-12-month revenue and a $2.2 billion market cap (share price times shares outstanding). It’s a highly volatile stock, but this Dallas-based company has a lot going for it as a builder and operator of data centers.
The company’s data centers are designed for high-performance computing, positioning it to benefit from the AI infrastructure boom. It currently has 286 megawatts of capacity for crypto mining customers at two locations in North Dakota, which are running at full capacity.
The negative is that Applied Digital is not turning a profit yet. But this is expected for a small business investing ahead of a huge opportunity. As new facilities open and revenue grows, profitability will follow. It’s on schedule to have a new facility in Ellendale, North Dakota, open by Q4 2025, with two more facilities in development that should be ready within the next two years.
It has a deal with Macquarie Asset Management to invest up to $5 billion to complete the buildout of its Ellendale campus. This deal will allow Applied Digital to construct more than 2 gigawatts of data center capacity, positioning it to have ample power supply to meet growing demand for AI workloads.
Other catalysts include a potential sale of its cloud hosting business, which made up a third of its revenue. This will allow Applied Digital to double down on its data center business and potentially set the groundwork for the company to transition to a data center real estate investment trust (REIT).
There are execution risks for a small player like Applied Digital, but its growing revenue, up 22% year over year in Q1, and major deals like the one with Macquarie paint a bright future.
2. Dell Technologies
Dell Technologies (DELL -0.11%) is not just a PC brand but the leading supplier of servers worldwide. While sales of PCs and peripherals make up a majority of its revenue, its server business will likely exceed its PC business in the next few years.
Revenue from infrastructure solutions, including AI-optimized servers, grew 12% year over year in Q1. This business makes up 44% of its revenue. Servers and networking revenue grew 16%, while segment operating income jumped 36% over the year-ago quarter. The strong growth here suggests a long-term opportunity to expand margins and grow earnings from AI demand.
Dell has great long-term prospects, with order bookings for its AI servers reaching $12 billion last quarter. This is higher than all of its shipments in the previous fiscal year. The company’s backlog stood at $14.4 billion, suggesting strong growth potential for its AI infrastructure group.
Despite strong growth in this business, the stock continues to trade at a cheap forward price-to-earnings (P/E) multiple of around 12.5. This reflects sluggish growth and competition in the PC business, as well as traditional servers.
Overall, Dell’s total revenue grew just 5% year over year last quarter. However, the improving margins in the infrastructure segment drove a strong 17% year-over-year increase in earnings per share. That is plenty of earnings growth to justify a higher earnings multiple, considering Dell’s leading position in the global server market.
As Dell’s infrastructure business continues to grow and make up a higher portion of revenue, the stock’s P/E will likely expand and juice returns for investors. Dell stock looks poised to deliver market-beating returns from the current share price over the next five years.
John Ballard has positions in Applied Digital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
