① Since artificial intelligence technology often requires a large amount of energy to develop and operate, utility stocks are becoming a new opportunity for investors; ② the S&P 500 utilities sector has risen by more than 4% so far this year; ③ Wall Street investment banks are also using this opportunity to create some new investment products.
Financial Services Association, April 28 (Editor Zhou Ziyi) Investors looking for unique ways to invest in the artificial intelligence boom in the stock market have found an interesting investment opportunity — the most traditional utility stocks.
Every industry, from chip makers to computer equipment manufacturers to automobile companies, wants to “get involved” with artificial intelligence, which has also fueled the recent round of stock market rebound. In the latest earnings season, Google's parent company Alphabet's market capitalization hit the $2 trillion milestone, and Microsoft's stock price also rose because both companies had shown progress in artificial intelligence in their previous quarterly earnings reports.
In connection with the wave of artificial intelligence, utility companies are useful because they are energy providers, and artificial intelligence technology often requires large amounts of energy to develop and operate.
Manju Naglapur, senior vice president and general manager of cloud, application and infrastructure solutions at global technology solutions company Unisys, said, “The demand for electricity in data centers is already huge. Coupled with the hype of artificial intelligence, the demand for electricity has skyrocketed. As more money is spent on data centers, electricity consumption will increase dramatically.”
Ryan Levine, head of Citigroup's utilities business, said, “The power of artificial intelligence is attracting the greatest interest from investors, and it has the potential to become the biggest driver of the industry (utilities).”
The utilities sector of the S&P 500 index fell 10% in 2023, the worst performing year since 2008, and the weakest performing sector in the benchmark stock index. However, as investors gradually realized the surge in demand for electricity consumption in data centers, the sector rebounded in 2024, rising 4.4%.
Electricity demand is soaring
Demand for electricity, led by data centers and artificial intelligence, is experiencing historic growth, and utility companies around the world are preparing for it.
Calvin Butler, CEO of Chicago energy supplier Exelon, said recently that artificial intelligence is expected to help drive a 900% increase in electricity demand for data centers in the Chicago area. This is about the electricity that can be generated by four nuclear power plants.
US Southern Power expects its electricity sales to grow at an annual rate of 6%, with about 80% coming from data centers.
For this reason, Wall Street investment banks are also starting to rub their hands.
According to reports, Goldman Sachs Group has also set up two investment baskets — Power Up America and Data Center Equipment — to help some customers seek alternative investments when artificial intelligence is exploding.
Although the bank did not disclose the specific stocks in the basket, the bank revealed that the selection was based on four types of stocks: unregulated utility companies, regulated utility companies, smart grid infrastructure, and power generation raw materials companies.
Faris Mourad, the company's US vice president, said in a telephone interview, “We think these topics, as well as Goldman Sachs's generalized AI basket, will be the most popular in the next few years.”
So far this year, the Power Up basket is up nearly 28%, and the Data Center Equipment basket is up more than 18%. Compared to the 8.3% increase in the technology sector of the S&P 500 index and the 17% increase in the communications services sector, the return on these two investment baskets is indeed very high.
Meanwhile, Mourad expects the earnings of the Power Up America basket at the end of 2024 to be 21% higher than the initial forecast in January 2023, and he believes there will be more earnings in the future.
The ultimate beneficiaries
Of course, all of this demand will only benefit if the utility company is able to produce electricity to meet the demand. Some energy experts worry that the US grid isn't ready for the upcoming wave of demand. This has led some investors to turn to companies that will be brought in to strengthen the grid, which will enable utilities to adapt to the new high-energy environment.
Walter Todd, chief investment officer at Greenwood Capital Associates, stated, “This will be a real challenge for traditional utility companies. The real beneficiaries of the surge in data center electricity usage are those who will benefit from the money spent on grid upgrades.”
Additionally, NexTERA CEO John Ketchum stated on Tuesday, “We believe renewable energy and energy storage are key drivers to help meet this growing demand.”