The fact that generative AI is extremely energy-intensive is a given
Businesses that supply that power appear prepared to reap the rewards.
The energy companies that power artificial intelligence (AI) could be wise investments for those seeking a dependable way to gain exposure, as AI is dominating stock market headlines.
Energy stocks could be a way to stay exposed to the theme without overinvesting in some of the more over-saturated stocks in the market, as many investors are becoming increasingly concerned about the amount of money being put into AI infrastructure.
Investors find it challenging to decide whether to stick with or stray from large tech megacaps when companies like Nvidia and the Magnificent Seven dominate the global stock market. Fears that the AI bubble might burst are growing, and valuations seem stretched.
However, if the AI rally is expected to continue, the downside risk causes a great deal of FOMO. AI seems to be having a significant impact on every aspect of business, and investors won't want to miss out on any possible future profits.
"There is an alternative way for investors to gain exposure to this monumental growth sector, regardless of your position on the AI stocks valuation debate," says Ocean Wall CEO and founder Nick Lawson. He claims that the key to this strategy is figuring out the industry's main bottleneck.
"That bottleneck is power," stated Lawson.
What is the energy consumption of AI?
The US's fastest-growing energy users are data centers. Data centers will make up 11% of all US power consumption by 2030, up from 4% in 2023, according to a Goldman Sachs analysis. By then, it is anticipated that 39% of the power consumption of data centers will come from AI facilities.
This demand may cause the supply of energy to be severely stretched. By 2028, there will be a 44 gigawatt (GW) power shortage in the United States, according to Morgan Stanley analysts.
Innovative "time-to-power" solutions like private fuel cells, nuclear reactors, and natural gas turbine transactions will be needed to close that gap.
Around the world, the same bottleneck is occurring.
According to Ashley Thomas, an infrastructure and renewable energy research analyst at Winterflood Securities, "new data centers in the UK will have to be developed in sites that can connect to the power grid and be supplied with reliable and, ideally, low-carbon energy."
"This implies that when assessing a data center location or project, securing power and a grid connection has become essential," Thomas continued.
"Smart entrepreneurs are spotting the opportunity, and investors alive to their vision are piling in in a market defined by scarcity of power and scarcity of time," stated Lawson.
How to make AI energy investments.
According to Lawson, one of the most promising investments in AI energy is Fermi America (LON:FRMI). In recognition of the US and European grids' incapacity to provide power on the scale and with the dependability that AI demands, it is creating private grids.
Lawson states, "Their solution is an 11-GW hybrid campus in Amarillo that combines clean natural gas, solar power, battery storage, nuclear baseload, and fiber-rich connectivity directly beside the next generation of data-center clusters."
Lawson believes that the market overreacted to a three-week delay in the first £150 million payment from a potential client, which is the main reason why Fermis stock has plummeted since its October 2 IPO.
According to Lawson, "Fermi and other companies that follow its lead will emerge as the investable bridge between digital demand and physical power, and one of the few ways to gain pure-play exposure to the US AI-energy nexus, as big tech begins to treat energy as strategic infrastructure."
However, Fermis volatility illustrates the dangers of making direct investments in this market. Investing in AI energy stocks via an investment trust can be profitable. This provides exposure to smaller, occasionally private businesses that may be more difficult to directly invest in, as well as the knowledge of a manager who actively investigates each investment.
"The closed-ended investment trust structure is especially well-suited for investing in hard-to-sell assets like data centers and energy infrastructure," stated Annabel Brodie-Smith, the Association of Investment Companies' (AIC) director of communications. "On the stock market, investors can buy and sell their shares, and their fund managers can manage their portfolio over the long term. The "
One possible choice is Pantheon Infrastructure (LON:PINT), according to Investec analyst Ben Newell.
According to Newell, "Pantheon Infrastructures' exposure extends through its power and renewable holdings." Among them are Intersect Power, a US renewable energy developer, and Calpine, a significant gas-fired power manufacturer.
"Both are well-positioned to benefit from rising energy demand driven by the demand for AI data centers," Newell stated.
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