AI Boom’s Secret Winners? The Companies Powering Data Centers
As more data centers go online, AI is set to drive a rally in what's traditionally the most boring corner of the stock market ... utilities.
April 29, 2024
![AI technologies require enormous amount of energy to develop and run. AI technologies require enormous amount of energy to develop and run.](https://eu-images.contentstack.com/v3/assets/blt8eb3cdfc1fce5194/blt1c5a4aed5b4bb34f/66508e7e04029dacb50e2562/410851764.jpg?width=1280&auto=webp&quality=95&format=jpg&disable=upscale)
(Bloomberg) -- Investors looking for a unique way into the stock market’s artificial intelligence boom are finding an intriguing bank shot in what’s traditionally the most boring corner of the equities universe: utilities.
AI is the buzzword these days, with everyone from chipmakers to computer equipment manufacturers to car companies trying to paint themselves in its hopeful colors. It’s also driving the latest stock market rally, as investors saw this past week.
On Thursday, Meta Platforms Inc. shares had their worst performance since October 2022 after the company said it would spend far more than expected on developing AI. Then on Friday, Google parent Alphabet Inc. soared past $2 trillion in market valuation while Microsoft Corp.’s stock also gained after the firms showed progress on AI in their quarterly results.
But here’s the thing about AI technology: It requires an enormous amount of energy to develop and run. And that’s where utilities come in.
“Power demand from data centers has already been humongous, then came the AI hype and the need for power skyrocketed,” said Manju Naglapur, senior vice president and general manager for cloud, applications and infrastructure solutions at Unisys Corp. “With all the money spent on data centers, the power consumption will increase massively.”
The S&P 500 Index’s utilities sector fell 10% in 2023, its worst year since 2008, making it the weakest group in the equities benchmark, which soared 24% overall. That wasn’t exactly a shock considering the companies tend to do poorly during periods of persistently high interest rates.
The stocks have recovered somewhat in 2024, rising 4.4% as cost controls offset higher refinancing expenses and record capital spending. But the biggest change in sentiment for utilities is the hope for surging demand from the new power-sucking data centers required for AI’s expansion.
Biggest Driver
“The AI narrative is capturing the biggest amount of investor interest,” said Ryan Levine, who heads utilities coverage at Citigroup Inc. “It has the potential to be the biggest driver of the industry.”
Across the US, utilities are preparing for historic increases in electricity demand led by data centers and AI. Even outside Data Center Alley in Northern Virginia, where Dominion Energy Inc. temporarily paused new data center connections in 2022 due to grid constraints, the companies are planning new power plants and transmission lines.
Artificial intelligence is poised to help drive a 900% jump in power demand