Undervalued Growth Stocks Amid AI and Defense Megatrends

The convergence of artificial intelligence (AI) and defense technology is reshaping global markets, creating fertile ground for companies that can deliver scalable solutions to these high-growth sectors. Two firms that stand out as compelling long-term buy opportunities-despite recent volatility-are Power Solutions International (PSIX) and Electro Optic Systems (EOS). Both companies exhibit strong fundamentals, robust revenue growth, and strategic alignment with megatrends that are accelerating demand for energy infrastructure and advanced surveillance systems.

Power Solutions International: Powering the AI Revolution

Power Solutions International (PSIX) has emerged as a critical player in the data center market, a sector that underpins the AI revolution. In Q3 2025, the company reported $203.8 million in net sales, a 62% year-over-year increase, driven by a $85.3 million surge in power systems demand, particularly for data centers. Net income also rose by 59% to $27.6 million, with diluted earnings per share (EPS) reaching $1.20.

Despite these gains, PSIX's valuation remains attractively low. As of November 28, 2025, its trailing twelve-month (TTM) P/E ratio stood at 10.26, significantly below the Industrials sector average of 26.66. This 62% discount suggests the market is underappreciating the company's role in powering AI infrastructure. While PSIX's gross margin dipped to 23.9% in Q3 2025 (down from 28.9% in 2024), this was attributed to temporary shifts toward lower-margin products and production ramp-up inefficiencies. These challenges are likely short-lived, given the long-term tailwinds of AI-driven data center expansion.

From a balance sheet perspective, PSIX holds $49.0 million in cash and cash equivalents while carrying $96.7 million in total debt as reported in Q3 earnings. This manageable leverage profile, combined with its strategic positioning in a sector expected to grow exponentially, makes PSIX a compelling candidate for investors seeking undervalued exposure to the AI megatrend.

Electro Optic Systems: Precision Optics for a High-Tech World

Electro Optic Systems (EOS), an Australian-based firm, is capitalizing on the global demand for electro-optical systems in defense and aerospace. In H1 2025, EOS reported $44 million in revenue with a gross margin of 76%, a 32% improvement year-over-year. While its fiscal semester EPS was -0.12, its trailing twelve-month net income reached AUD 31.06 million, translating to an EPS of 0.17 as per financial analysis.

EOS's market is projected to grow at a 4.52% CAGR through 2034, driven by defense modernization and AI integration in surveillance systems. The company's products are already embedded in high-margin applications such as air-based reconnaissance and autonomous weapon systems, with the aerospace segment expected to grow at the fastest rate due to demand for navigation and communication technologies as reported in market research.

Valuation metrics highlight EOS's potential. Its P/E ratio of 31.13 reflects a premium to PSIX but aligns with its higher-growth profile. Despite a beta of 2.04-indicating significant volatility-EOS's balance sheet is robust, with a debt-to-equity ratio of 0.06 and a current ratio of 4.36 as per financial data. The stock has surged 351.35% over the past 52 weeks, but its fundamentals suggest this growth is justified by its leadership in a sector poised for decades of expansion.

Why These Stocks Are Buy Opportunities

Both PSIX and EOS are undervalued relative to their long-term growth trajectories. PSIX's low P/E ratio and critical role in powering AI infrastructure make it a bargain in a sector where energy demand is set to explode. Meanwhile, EOS's high gross margins, strong balance sheet, and alignment with defense and aerospace innovation position it to capitalize on multi-decade trends.

The recent volatility in both stocks-whether due to sector-specific challenges (PSIX's margin pressures) or market overcorrections (EOS's beta-driven swings)-presents an opportunity to acquire shares at discounted prices. For investors with a 5–10 year horizon, these companies offer a rare combination of defensible fundamentals and strategic relevance to megatrends that are reshaping the global economy.