The postelection panic over data centers has led to a widespread tech selloff, but some stocks are more insulated than they seem, according to Bernstein
Sandisk shares are trading at just 3.7 times forward earnings, a 65% discount to the flash-memory maker's historical average.
Investors spooked by potential data-center delays have dumped artificial-intelligence stocks indiscriminately - and it's shaping up to be a classic case of throwing the baby out with the bathwater, according to Bernstein analyst Mark Newman.
In his view, that means investors have an opportunity to scoop up unfairly punished stocks at bargain prices.
After the results of the midterm elections, Wall Street has been applying a blanket discount to AI hardware stocks, as investors anticipate regulatory hurdles to obtaining data-center permitting and construction approvals, Newman wrote in a Friday note.
However, some stocks that generate a lot of AI-related revenue may actually have "materially less exposure" to the data-center buildout than investors might assume, according to Newman.
He sees opportunities in hardware names such as Dell Technologies (DELL), Seagate Technology Holdings (STX), Western Digital (WDC) and Sandisk (SNDK), as well as in data-center developers like Equinix $(EQIX)$ and Digital Realty Trust (DLR).
Shares of the Dell have tumbled over 20% since the beginning of November. "Dell provides the clearest example of why AI server revenue should not be equated with data-center earnings exposure," Newman wrote.
Bernstein estimates that AI servers will contribute just 11.7% of Dell's operating profit for the fiscal year that ends in January. The majority of Dell's earnings comes from traditional servers and enterprise infrastructure, making the stock less exposed to any delays in data-center buildouts.
Newman thinks the selloff has also created deep discounts in storage names like Seagate and Western Digital, along with flash-memory provider Sandisk - all of which are down nearly 20% in the past two weeks.
While a significant portion of hard-disk-drive demand does come from data centers, Newman believes Seagate and Western Digital will be able to command high prices given ongoing shortages. Additionally, he anticipates that AI workloads will increasingly occur on on-premise infrastructure, reducing data-center reliance in the future.
Sandisk has "one of the most stretched deratings in our analysis," Newman added, referring to a dramatic decrease in its valuation multiple. With shares trading at just 3.7 times forward earnings - a 65% discount to their historical average - he thinks Sandisk has been unfairly hammered.
The high-bandwidth memory used for AI chips requires three to six-and-a-half times more silicon-wafer capacity to produce than standard flash chips. Sandisk could also see a boost in its business-device division as everyday companies run more AI tools locally on their own networks.
Among data-center builders and operators, Equinix and Digital Realty operate in a very different way compared to riskier cloud providers like CoreWeave (CRWV), Newman said. They've fared better than the other names on the list, with Equinix shares up 4% and Digital Realty shares down less than 1% since the beginning of the month.
Equinix's business is focused on enterprise colocation, meaning that it rents out servers to companies for storing enterprise infrastructure. The company recently logged its fourth straight quarter of double-digit recurring revenue growth and raised its full-year outlook for the third consecutive quarter.
Digital Realty has more exposure to large cloud facilities that could be sensitive to power and construction timelines. However, Bernstein flagged that the company's cloud portfolio is anchored by high-quality tenants locked into 15- to 20-year leases.
-Christine Ji
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