Undervalued and Ignored: 2 Artificial Intelligence (AI) Stocks With Market-Beating Potential

Key Points

• Data center capacity could be increasingly difficult to come by in the coming years, which is a huge opportunity for Applied Digital.

• Growing demand for servers is fueling strong growth for Dell, but its stock is valued very conservatively.

• 10 stocks we like better than Applied Digital ›

It might seem impossible to find fast-growing companies in the artificial intelligence (AI) market that are undervalued, but they are out there if you look in the right places. While chips and software companies are trading at high multiples of their earnings, the companies meeting the demand for AI infrastructure like data centers trade at attractive valuations.

Here are two undervalued stocks that could potentially double within three years and outperform the broader market.

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1. Applied Digital

In just the last three months, Applied Digital (NASDAQ: APLD) stock has surged 132%. Investors are realizing the value here following the company's $11 billion AI infrastructure deal with CoreWeave. This is validating the company's strategy to build data centers for AI workloads.

Leading hyperscalers like Microsoft and Google can certainly afford to build their own data centers. However, the demand for AI is accelerating, and data centers require lots of power to operate. Some analysts see the potential for a power shortage in the next five years, but Applied Digital has secured power for its facilities that will be increasingly valuable to AI researchers looking for more data center capacity.

One of Applied Digital's advantages is quickly and cost-efficiently building new data centers. It has spent the past two years shortening the build times of new facilities from two years to about one, which will allow the company to scale more rapidly to take advantage of the opportunity.

Applied Digital's revenue grew 41% year over year in the most recent quarter. While it posted a net loss of $26 million, management is targeting $1 billion in operating profit within the next five years.

Applied Digitial is in advanced talks that could result in another major deal in the near term, while it's in various stages of negotiations with others. To be this far along in negotiations is further validation of Applied Digital's value. It requires a lengthy and complex process to finalize these deals. Every deal it announces just compounds the company's future profit potential.

The stock will likely jump on each new deal announced. The shares are that undervalued. At the company's current market cap of $6.2 billion, the market is valuing the stock at just 6 times management's long-term operating profit target. The stock could double over the next few years depending on how many more deals it announces.

2. Dell Technologies

Dell (NYSE: DELL) continues to report strong demand for AI servers, which makes up the bulk of its revenue, yet the stock remains cheap, trading at less than 15 times forward earnings estimates.

Dell reported a record quarter in Q2, with revenue up 19% year over year, reaching nearly $30 billion. More than $16 billion of this comes from its infrastructure solutions segment, including servers. The rest of the business comes from PCs and accessories, which continues to be a profitable, although slow-growing, business.

As the leading supplier of servers, Dell is well positioned to benefit from growing demand for AI infrastructure. Dell's advantage is its ability to supply AI-optimized server racks with advanced cooling technologies and other value-added services.

Dell also has a great relationship with AI chip leader Nvidia. This allows Dell to be among the first to receive Nvidia's latest chips, which helps it deliver cutting-edge solutions to customers quickly when new technology is available.

Demand is not slowing, as Dell reported its five-quarter pipeline continues to grow each quarter, driven by growth from the enterprise and government markets.

Management sees a long-term addressable market in AI hardware and services of $356 billion by 2028. That is almost double the estimate from last year. Investors are underestimating this opportunity. The stock's forward price-to-earnings multiple sits at 14 on this year's consensus earnings estimate.

Analysts expect Dell's earnings to reach $12.34 in 2028. If investors value Dell more like a growth stock at, say, 20 times those estimates, that would put the share price at $246 in three years. That's just shy of a double over its recent $133 share price.

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John Ballard has positions in Applied Digital and Nvidia. The Motley Fool has positions in and recommends Alphabet, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.