2 ASX artificial intelligence (AI) stocks to buy instead

Looking back, OpenAI’s launch of ChatGPT in November 2022 was a defining moment in the development of artificial intelligence (AI).

As the world rushes to get a piece of AI, several AI-related companies saw their share prices rise. The main example is Nvidia Corp shares, which have increased 10-fold since October 2022.

In Australia, shares in NextDC Ltd (ASX: NXT) and Macquarie Technology Group Ltd (ASX: MAQ) are up 93% and 59%, respectively, in less than two years.

Many experts believe that the AI ​​transition is just the beginning. Wondering which industries the AI ​​revolution will impact next? Tesla CEO Elon Musk may have already given us a hint.

In a March 2024 interview at the Bosch Connected World conference, he said:

A year ago, the shortage was chips, neural chips. Then, it was very easy to predict that the next shortage would be low voltage transformers. Then, the next shortage will be electricity.

They won’t be able to find enough electricity to run all the chips. I think next year, you’ll see that they just can’t find enough electricity to run all the chips.

With that in mind, here are two ASX small caps in the electric utilities sector.

Southern Cross Electrical Engineers Ltd (ASX: SXE)

Established in 1978, Southern Cross Electrical Engineering (SCEE) provides specialist electrical, instrumentation, maintenance and communications services in Australia.

The company has three business units: resources, commercial and infrastructure. It offers its services to some of the biggest companies, including The Woolworths Group, The Coles Group, BHP GroupAND Rio Tinto.

Southern Cross Electrical sees exponential growth in data centers as the sector benefits from developments in cloud computing and AI. In presenting the results of 1H FY24, the company said:

Data centers are electrically dense, electrical work making up the largest component of the construction cost. SCEE has announced 13 data center awards worth over $120 million in the past four years.

[The company is] is currently bidding or positioning for over $500 million of work to be awarded over the next two years for expansions to existing or new buildings of 12 separate data centers.

The company forecasts at least $53 million in earnings before interest, taxes, depreciation and amortization (EBITDA) in FY25.

This is a significant increase from $33 million in the last 12 months to December 2023. The increase is driven by the acquisition of MDE Group and strong organic growth.

Southern Cross Electrical had a net cash position of $54 million as of December 2023, which equates to 12% of its current market capitalization of $440 million. That means its enterprise value (EV) — defined as market capitalization plus net debt — is $390 million.

Based on management’s FY25 guidance, the stock is valued at an EV/EBITDA multiple of 7x. In terms of price-to-earnings (P/E) ratio, shares of Southern Cross Electrical are valued at 14x 25-year earnings estimates from S&P Capital IQ.

Southern Cross Electrical’s share price has risen 160% over the past year and is currently trading at $1.69.

The other is IPD Group, a leading distributor of electrical and automation solutions in Australia. The company boasts a rich history of more than 70 years in this field and offers a wide range of electrical services.

There are some similarities between Southern Cross Electrical and IPD Group. Both are in the utility industry across the country, have exposure to data centers and other AI-related industry changes, and are proactive in M&A activities.

IPD Group has recently made several strategic acquisitions, including Addelec, EX Engineering and CMI Operations. Due to these acquisitions, along with strong organic growth, management expects FY24 EBITDA to be between $39 million and $39.5 million, marking a 42% increase from last year.

IPD Group shares are valued at 16x 25-year earnings estimates by S&P Capital IQ.

IPD Group’s share price has traded mostly between $4 and $5 in the past year and is at $4.62 at the time of writing.