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AI Revolution Fuels Growth for Power-Centric Investments


Lauren Miller

April 20, 2024 - 11:41 am


Powering the Future: The Emerging Synergy Between AI Technologies and Utility Sectors

The landscape of investment is undergoing a significant transformation, with artificial intelligence (AI) becoming a pivotal area of interest. Investors are now expanding their horizon, looking beyond the traditional tech firms and turning to sectors like real estate, energy, and utilities. This shift comes as the growing power needs of data centers, the backbone for AI technologies, are booming, creating a ripple of demand across various industries.

The Surge in Data Center Power Demand

As the world leans more into AI technologies, there is an escalade in the power consumption of data centers. Industry insiders have observed a substantial increase in energy requirements as new data centers are constructed to sustain this technological advancement. Thomas Thornton, an industry analyst, emphasized this uptrend in a recent report. He noted that present power consumption projections for U.S. data centers under construction could exceed half of the current usage by existing facilities. Thornton anticipates that within several years, after the completion of these data centers, power consumption may potentially double once more.

The relentless demand for 'traditional' data center space is notably significant, and Thornton further remarks that the real strength lies in the pricing power of these services. AI demand, which is still nascent, is expected to see its power requirements surge, with predictions of annual compounded growth of 25% to 33% from 2023 through 2028. AI tends to run on graphics processing units, which are substantially more power-intensive than their predecessors, and the power consumption of these GPUs has been increasing, favoring the design and development of newer data centers optimized for AI workloads.

The Beneficiaries of the Rising Power Needs

A number of companies are poised to benefit from the explosive growth of power demanded by data centers, according to Bank of America analysts. Notably, Caterpillar and Equinix are among the top picks for investment. Caterpillar, often labeled as "underrated" within this sphere, is celebrated for its legacy in providing engines for backup power generation. The firm underscores that even amidst a slowdown in other markets, data centers have been a strong contributor to Caterpillar's earnings, with its power generation unit outstripping the growth of the company's overall performance in the last four quarters.

Moreover, Caterpillar's management is adjusting its capital expenditure strategy for the first time in a decade, aiming to cater to the burgeoning power demand by data centers. As per Bank of America's assessment, Caterpillar stocks have potential for a 7.6% uptick, factoring in a price target of $385. Despite a notable 20% increase this year, the firm's shares have seen a 3% dip over the previous week.

Real estate investment trusts (REITs) such as Digital Realty Trust and Equinix are also capturing the advent of AI demand. Both corporations forecast appreciable revenue growth for the current year. However, there are diverse projections when it comes to net income. Analyst David Barden conveys that Equinix demonstrates robust bottom-line growth, validating its Top Pick status, while Digital Realty is perceived more as an entity with future growth potential. Despite being historically a slower growth entity, Digital Realty's solid top-line trends signal a promising future for the company.

Additional Industry Standouts

Barden and his colleagues from Bank of America are keeping an optimistic view on several other businesses such as software giant Aspen Tech and electrical components manufacturer Eaton. There is a belief that Eaton's shares could further see a 12.2% increase following a 25% growth this year. The belief in a premium valuation for Eaton is reinforced by the expectation of an upward trajectory bolstered by cyclical operating leverage, strong margin performance, and a less cyclical portfolio.

The upsurge in data centers isn't just a tide raising the boats of tech-centric companies; traditional utility operations are also set to capitalize. Energy providers like Constellation Energy and Dominion Energy are marked as potential beneficiaries due to their role in meeting the energy demands of these burgeoning technology infrastructures.

Demand Dynamics: AI and Data Centers

As the world grapples with the realities of generative AI, the traditional demand for data center services is magnifying. Analysts predict that with AI's expansion, demand will unfurl in two distinct stages—training and inference. The initial stage, where new AI models are trained, will necessitate considerable power and advanced cooling systems. Following this, the construction of new data centers will be essential to accommodate the resulting needs.

This ballooning demand for data centers could potentially outstrip the available supply, leading to a significant market gap. The surge in AI applications across various sectors amplifies the data center demand, underscoring the importance of expanding and upgrading the electric grid and related infrastructure. To that end, the reliance on essential commodities such as uranium and copper, which are integral for power cabling and the electrical network serving data centers, is also anticipated to climb.

Implications for Investors and the Industry

For investors, the integral role that AI plays in the tech ecosystem, along with its sprawling impact across various sectors, creates a broad spectrum of potentialities. Besides the surge in the development of advanced data center components, the providers of these parts—from power producers to grid technology makers—will be vital in supporting the infrastructure required for this expansion.

Moreover, as data centers become more specialized to accommodate AI operations, the demand for facilities outfitted with efficient cooling systems and more robust power backup solutions is only expected to increase. Companies capable of delivering these advanced solutions are likely to see sustained growth and investor interest.

The rising cost and complexity of data center operations require businesses to invest heavily in ensuring resilience and reliability. The advent of AI enhances this need, pushing industries to reimagine and reconstruct their infrastructure to be AI-compatible. Consequently, energy-efficient and AI-oriented data center designs are becoming mainstream, with a significant emphasis on sustainability and reduced environmental footprint.

The Role of Innovations in Power Generation

Caterpillar's proactive approach in increasing its capital expenditure to meet the needs of the data centers reflects the company's commitment to innovation in power generation. By tapping into their extensive history of manufacturing dependable backup power systems, including diesel generator sets, they are reinforcing their position in a market that is becoming increasingly dependent on reliable power solutions.

Caterpillar's installed base of over 450,000 kilowatts in data centers and hospitals in a single year speaks volumes about the trust and reliability that the brand has built over the years. With AI applications becoming more ubiquitous, the demand for such reliable power solutions is likely to soar.

A New Frontier for REITs: Digital Realty and Equinix

The movement towards AI-centric data centers is carving out a new frontier for REITs like Digital Realty and Equinix. With substantial expected increases in stock value—24% for Digital Realty and 33% for Equinix—these companies represent a novel opportunity for investors keen on getting ahead in the AI revolution. The top-line growth hints at their potential for profitability and investor rewards.

As these companies venture into the AI landscape, the differences in their bottom-line growth trajectories illustrate the varying strategies and potential for future gains. Equinix's steadfast bottom-line growth supports its status as a Top Pick, while Digital Realty's story remains a narrative of promised growth—putting it in a "show me" category according to Barden. It's a narrative marked by the anticipation of future revenues and a potential surge in their market share.

The Road Ahead: Challenges and Opportunities

The narrative of data center expansion and AI-driven demand places the industry at a critical juncture. The sector faces a gargantuan task of matching supply with the burgeoning demand. Infrastructure enhancements, technology upgrades, and strategic investments are required to bridge the gap and ensure a sustainable model for growth.

The ongoing revolution powered by AI is more than just an evolution of technology; it's a comprehensive paradigm shift that impacts everything from investment strategies to the very infrastructure that powers our increasingly digital lives. As the AI epoch matures and technology continues to permeate every aspect of the modern world, the alliance between the AI technologies and utility sectors heralds a new era of economic growth and innovation.

In conclusion, the burgeoning power demands of AI-driven data centers are sparking a new wave of investment opportunities across a spectrum of industries. From manufacturers like Caterpillar to REITs such as Digital Realty Trust and Equinix, a variety of companies are positioning themselves to harness the growth potential in this burgeoning sector. As traditional utility companies also start to feel the effects of this surge, the ripple of demand highlights the significance of the AI revolution's impact on our power infrastructure. Investors keeping a keen eye on the space may find significant rewards in these transformative times.