Imagine a stuffy room, with no windows, and rows of servers. It’s hot, and thousands of computers are running simultaneously, with giant industrial fans whirring to cool everything down.
Across the street, another data center is under construction. An entire industrial complex is springing up. Construction companies are struggling to keep up with the demand.
This scene encapsulates the massive computing power required for artificial intelligence (AI) to flourish. And while it’s far removed from the glitz and glamour of tech giants with world-dominating valuations, some of the winners from this wave will be companies doing the unglamorous work.
Specifically, data centers, which play an increasingly crucial role in storing information as AI becomes more prevalent. These centers are among the most overlooked beneficiaries of the AI wave.
Goldman Sachs predicts that data center power demand will surge by 160% by the end of this decade. They estimate that the search queries powered by ChatGPT will consume ten times more electricity than a basic Google search.
As a result, the AI revolution could benefit companies in construction, utilities, power, and data centers. Often considered the dullest, most defensive sector of the market, these companies may offer some of the most exciting investment opportunities.
The Quiet Winners
Companies have poured billions of dollars into data centers, and stocks related to construction and power provision in the US are seeing impressive gains.
The utility sector has been the third-best performer on the S&P 500 over the past six months. This group is only outperformed by sectors like IT and communication services, which include AI giants like Meta, Nvidia, and Alphabet. Typically, when large companies grow, the “defensive” group lags far behind.
Digital Realty Trust, the only data center-focused real estate investment trust listed on the New York Stock Exchange, has risen 27% in the past year, while the Global X Data Center & Digital Infrastructure ETF is up 12%.
Supporting stocks in the power sector have also had a strong 2024. Super Micro Computer, which provides liquid cooling technology for AI hardware, is up 117% this year. Even Nvidia has “only” risen 167% in 2024.
Another company, Vertiv, which manufactures power and cooling equipment for data centers, is up 70%.
Globally, stocks of grid equipment and power companies in the US, South Korea, India, and Europe have surged 140% year-to-date, according to a recent JPMorgan analysis.
According to Travis Miller, Morningstar’s strategist for energy and utility pricing, investors are unaccustomed to viewing energy and utility stocks as a gold mine due to the sector’s modest profits over the past decade. But growth is coming. Morningstar forecasts a 10% annual growth rate for this sector over the next ten years.
However, despite their recent outperformance, it may take years for the data center boom to be fully recognized. Miller estimates that it won’t be until 2028 that new data centers will start to impact companies’ revenues. This means that investors will have to wait to see the full potential of this industry.
He also added that the construction of numerous data centers raises concerns about whether countries have sufficient energy resources to support them.
Source: BI
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