3 Stocks to Buy For the Next Wave of AI Infrastructure

Key Concepts

• AI Infrastructure: The foundational technology and physical assets required to support the development and deployment of Artificial Intelligence. This includes data centers, computing power, and cooling systems.
• Hyperscalers: Large cloud computing providers like Microsoft, Meta, and Amazon that are driving demand for AI infrastructure.
• Data Centers: Facilities that house computing infrastructure, including servers, storage, and networking equipment, essential for AI operations.
• AI Factory Campus: A specialized data center designed for AI workloads, often with high-density computing power and advanced cooling.
• Ready for Service (RFS): A milestone indicating that a facility is operational and ready to host clients.
• Megawatt (MW): A unit of power, used here to describe the capacity of data centers.
• Short Interest: The number of shares of a stock that have been sold short but have not yet been covered. High short interest can indicate bearish sentiment but also potential for short covering rallies.
• Short Covering: The act of buying back shares that were previously sold short to close out a position.
• Profit Taking: Selling a stock to realize gains after its price has increased.
• Renewable Energy: Energy derived from natural sources that are replenished at a higher rate than they are consumed, such as solar or wind power.
• Bitcoin Mining: The process of verifying and adding new transactions to the Bitcoin blockchain, which requires significant computational power and energy.
• Liquid Cooling Technology: An advanced cooling method for data centers that uses liquids to dissipate heat, significantly more efficient than traditional air cooling.
• Compound Annual Growth Rate (CAGR): A measure of the average annual growth rate of an investment over a specified period of time.
• 50-day Simple Moving Average (SMA): A technical indicator that calculates the average closing price of a stock over the past 50 days, often used to identify support and resistance levels.

AI Infrastructure Stocks to Watch

The discussion focuses on the burgeoning AI infrastructure sector, highlighting the significant buildout of data centers and the associated technologies required to support AI development. While Wall Street's predictions vary, the consensus is that the demand for AI infrastructure is strong, driven by hyperscalers like Microsoft, Meta, and Amazon. The key challenge is building this infrastructure first to validate the demand. The outlook for these stocks is primarily considered for a one-to-two-year horizon, as this is the estimated timeframe for the current buildout phase. After this period, the sustainability of demand will be the critical factor.

1. Applied Digital (APLD)

Applied Digital is presented as a data center play with a key differentiator: existing long-term AI hosting agreements. This provides analysts with greater visibility into long-term revenue.

• Key Developments:
  • Successful and on-time Ready for Service (RFS) for the second phase of its Polaris Forge 1 AI factory campus in North Dakota.
  • The first contracted building on the Polaris Forge campus is now operating at its full 100-megawatt (MW) capacity.
• Stock Performance & Volatility:
  • Spiked approximately 15% in the last week following the RFS announcement.
  • Currently trading slightly above its consensus target price.
  • Consensus price targets have been moving upwards, with Needham & Company setting a target of $41 (approximately 25% higher than current trading price) at the end of October.
  • Experienced significant volatility, with over 308% gains year-to-date.
  • Approximately 31% short interest, suggesting recent rallies may be fueled by short covering.
• Long-Term Outlook:
  • The core question remains whether the "AI data center as a mall" concept will be sustainable long-term.
  • The speaker defers to hyperscalers' demand for data centers as an indicator of future need.
  • Applied Digital's secured long-term contracts mitigate some short-term risk.
  • The next 12 months are considered "fine" for Applied Digital, but volatility is expected to continue.
  • A MarketBeat article offers a deeper dive into the potential upside and risks.

2. Iron Limited (IRNT)

Iron Limited is another company involved in AI infrastructure and data centers, with a unique selling proposition of powering its facilities with renewable energy.

• Business Model & Pivot:
  • Originally a Bitcoin miner, Iron Limited has pivoted to AI infrastructure and data center plays.
  • All data centers are powered by renewable energy.
• Stock Performance & Volatility:
  • Up 360% year-to-date.
  • Experienced a significant downturn in the last month, down approximately 32%, and 5.5% in the last week.
  • This volatility is largely attributed to its reliance on Bitcoin mining revenue to fund its operations.
  • When Bitcoin prices rise, Iron Limited benefits; when Bitcoin prices fall, its revenue and stock performance suffer.
  • A strong correlation is expected between the Bitcoin chart and Iron's stock chart.
  • Recent rallies in Bitcoin have led to some speculation of a potential rally in Iron's stock.
• Dependence on Bitcoin:
  • The company's short-term viability is tied to Bitcoin revenue to fund infrastructure buildout.
  • Long-term, it may transition to a more independent AI infrastructure player as its organic data center business generates sufficient revenue.
• Analyst Sentiment:
  • Analysts appear more bullish on Applied Digital's future price action compared to Iron.
  • Some recent price targets from institutions like JP Morgan, while raised, are below the current consensus, suggesting a potential re-evaluation due to Bitcoin's slump.
• Comparison to Dot-com Era:
  • The volatility and uncertainty surrounding AI infrastructure companies are compared to the dot-com era, though the speaker cautions against a direct parallel, emphasizing the tangible buildout happening in AI.

3. Verive (VRT)

Verive is positioned as a critical enabler of AI infrastructure due to its leadership in liquid cooling technology.

• Core Business:
  • Specializes in liquid cooling technology for data centers.
  • Addresses the significant heat generated by AI workloads, which traditional cooling systems struggle to manage.
  • Liquid cooling systems are estimated to be up to 3,000 times more efficient than conventional systems.
• Market Opportunity:
  • Demand for liquid cooling technology is forecasted to grow at a 20% CAGR through the end of the decade.
• Stock Performance & Volatility:
  • Has not escaped the volatility of other AI stocks but has shown more resilience.
  • Up 45% in the last 3 months and 60% year-to-date.
  • Maintained gains in the last month, up about 1% while other tech stocks have declined.
  • Currently trading slightly above its consensus price target.
• Analyst Targets & Outlook:
  • Several analysts have raised price targets for Verive, with figures like Cowen ($211), UBS Group ($2011 - likely a typo in transcript, should be $211), and Citigroup ($199) exceeding the consensus target of $178.
  • The consensus target is expected to rise.
  • Low short interest, indicating less headwinds compared to other AI infrastructure stocks.
• Long-Term Perspective:
  • Verive is seen as an investment in the buildout itself, with Applied Digital and Iron investing in companies like Verive.
  • The short-term outlook is positive due to ongoing data center construction.
  • Long-term, revenue and earnings are expected to normalize from a hypergrowth phase as demand stabilizes.
  • Verive is described as a "slow and steady choice" compared to the higher growth and volatility of Applied Digital and Iron.
  • The stock has crossed its 50-day simple moving average, which has acted as a support level, suggesting a potentially good entry point.

Investment Horizon and Strategy

The discussion emphasizes a one-to-two-year outlook for these AI infrastructure stocks, aligning with the estimated timeframe for the current buildout phase. Beyond this period, the sustainability of demand will be the crucial factor.

• Not "Forever Stocks": These are not presented as buy-and-hold "forever stocks" but rather as opportunities for the next two to four years.
• Profit Management: Investors are advised to monitor these investments and consider taking profits along the way.
• Bridget's Watchlist Choice: Bridget opts to add Verive to her watch list, citing its lower volatility and perceived dependability over the next few years, believing it will be busy with contracts.
• Chris's Agreement: Chris agrees with Bridget's reasoning, highlighting Verive's more manageable growth and positive chart setup.

Conclusion

The AI infrastructure sector is experiencing significant growth and investment, driven by the demand for data centers and the technologies that support AI. While companies like Applied Digital and Iron Limited offer high growth potential, they also come with considerable volatility, influenced by factors like short interest and cryptocurrency prices, respectively. Verive, with its focus on essential liquid cooling technology, presents a potentially more stable, albeit still growth-oriented, investment within this ecosystem. The key takeaway is that these are short-to-medium-term plays, with investors needing to carefully manage their positions as the AI infrastructure buildout progresses and demand dynamics evolve.