Stock market

This £3 value stock could rise in an AI boom.

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The UK stock market has massively underperformed in recent years. So are a lot of value stocks London Stock Exchange now.

One I bought for my portfolio. Volex (LSE: VLX). In the coming years, I think the artificial intelligence (AI) boom could send this stock higher.

A data center game

One way I see the AI ​​theme playing out is by building data centers. These provide the computer processing power along with the data storage space required to run AI applications.

That’s where Volex comes in. As a manufacturing company, it generates a large portion of its revenue from making power cords and data transmission cables for data centers.

It therefore looks well-placed to benefit from the construction of these facilities in the coming years.

It’s worth noting that according to Prescient & Strategic Intelligence, the global data center market could be worth around $620bn by 2030, up from $340bn today (10.5% annual growth).

Given this growth outlook, I think Volex has a very bright future.

Increased income

Already, Volex is having a lot of success on the data center front. For the 26 weeks to October 1, 2023, for example, revenue at its Complex Industrial Technology division grew a whopping 30.1 percent on an organic basis.

Meanwhile, in a recent trading update, the company said the division had “Very strong growthFor the entire financial year (ended 31st March).

The company noted in the update that growth from this division was driven by increased sales of high-speed data center cables.

Increasing investment in artificial intelligence technology requires intensive data processing, an application ideally suited to the innovative products that Volex has developed.

Volks H1 2024 Report

An undervalued stock

However, despite this momentum and attractive growth outlook, Volex shares are currently undervalued.

The price-to-earnings (P/E) ratio here is just 12, with analysts forecasting earnings per share of 36.1 cents for the year ending March 31, 2025.

I believe the company is undervalued beyond its earnings. In my opinion, I think its P/E ratio should be somewhere between 15 and 20 (which means that the share price rises substantially from here).

A lot of potential

It’s worth mentioning that Volex also makes products for the electric vehicle (EV), healthcare, and consumer electrical markets. I like this business diversification. However, there is a risk that any of these markets could face a slowdown.

We have seen this scenario recently with the EV market. In H1, Volkswagen’s EV revenue declined.

Another risk to consider is acquisition. This is a company that likes to buy small manufacturing businesses. The problem is that acquisitions don’t always work.

Overall, I like the risk/reward proposition. With a low valuation, and growth coming from a global data center, I think this value stock has the potential to generate attractive returns in the coming years.

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