This Overlooked AI Stock Is Stronger Than It Has Ever Been

05/05/2024

Brookfield Infrastructure (NYSE: BIP)(NYSE: BIPC) operates a globally diversified portfolio of infrastructure assets. The company’s pipelines, ports, transmission lines, and railroads are part of the backbone of the global economy.

That focus on the real economy has caused many investors to overlook the inroads it has made in building out the backbone of the digital economy. In recent years, it has invested heavily in data centers, semiconductor fabrication facilities, and other data-related infrastructure assets. These investments have put Brookfield Infrastructure in an extremely strong position to grow rapidly, driven partly by its ability to capitalize on the artificial intelligence (AI) megatrend.

Repositioning the portfolio for more powerful growth

Brookfield Infrastructure is coming off a strong first quarter. The company’s funds from operations (FFO) surged 11% compared to the prior-year period. The main driver was its transport segment. FFO from that unit rocketed by 57% compared to the year-ago period, fueled by its recent acquisition of container-leasing company Triton, inflation-driven tariff growth, and rising volumes. That helped more than offset the flat to down years of its utilities and midstream segments.

The company’s data segment also had a quiet quarter as FFO was flat compared to the prior-year period. However, that was mainly due to the sale of its interest in a New Zealand integrated data distribution business that closed last year. That offset the positive contributions from recently acquired assets, including two hyperscale data center platforms and 40 retail colocation data centers out of bankruptcy. Those deals significantly enhanced the scale of its global data center footprint.

Brookfield has also sold several more assets this year. It closed $1.1 billion of deals in the first quarter, putting it in a strong position to achieve its $2 billion capital recycling target. That cash will enable the company to capitalize on future investment opportunities.

Brookfield Infrastructure noted in its first-quarter earnings release that its “investment pipeline remains quite full.” Because of that, it’s focused only on pursuing opportunities that can generate the highest risk-adjusted returns, which, at the moment, are organic expansions and tuck-in acquisitions.

A position of strength with a growth accelerator coming down the pipeline

Despite the headwinds from higher interest rates, “our business is the strongest it has ever been,” wrote CEO Sam Pollock in his first-quarter letter to investors. He noted several factors that frame this view, including the sector tailwinds driving its organic growth.

He further commented, “Our sector leading organic growth is highly correlated to the two most significant trends of this decade, namely, decarbonization and AI/digitalization.” On that latter trend, Pollock highlighted its investments in its semiconductor and data center businesses, which “will fuel our growth for many years.”

The CEO highlighted that Brookfield continues to see “significant activity across our global data center platform.” It enhanced its ability to capitalize on the currently strong environment by acquiring two more data center platforms late last year and purchasing several data centers out of bankruptcy. He noted that those businesses are seeing building momentum and have already exceeded their initial return expectations.

The company’s recent acquisitions and strong demand have enabled it to commercialize meaningful capacity at favorable terms. It currently has 670 megawatts (MW) of booked-but-not-built capacity it expects will come online over the next three years. That positions it to grow the FFO from its data center business by about 2.5 times over the next several years.

On top of that, the company previously partnered with Intel to invest $30 billion (Brookfield Infrastructure’s share is $3.9 billion, including $500 million of equity) into building two semiconductor manufacturing facilities in Arizona. This investment will enable it to capitalize on the strong semiconductor market, which should see exponential growth in the coming years because chips are crucial to digitalization and AI.

Megatrend-powered growth

Brookfield’s investments in building a global data center platform and semiconductor plants put it in a strong position to capitalize on the digitalization megatrend. These investments should power robust growth for the company in the coming years.

However, the market isn’t crediting the company for this growth potential. Its shares are down about 15% over the past year, even though its long-term growth prospects have strengthened. With the company expecting to deliver double-digit annual FFO per share growth in the coming years, it could produce robust total returns, especially when adding in its 5%-yielding and growing dividend. These features make it an AI stock that investors won’t want to overlook.

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Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, and Intel and has the following options: long January 2025 $30 calls on Intel, short January 2025 $30 puts on Intel, short June 2024 $50 calls on Intel, and short May 2024 $50 calls on Intel. The Motley Fool recommends Brookfield Infrastructure Partners and Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.