Beyond Semiconductor Stocks: 2 Under-the-Radar Ways to Cash In on the AI Megatrend

24/02/2024

The artificial intelligence (AI) revolution has been a major boon for the semiconductor industry. AI applications require significant computing power, and that’s driving an estimated $50 billion in incremental demand for semiconductors optimized for AI this year, up from next to nothing two years ago. According to forecasts compiled by Deloitte, by 2027, demand for AI chips could more than double from here to $110 billion, or potentially grow significantly faster to $400 billion.

AI’s nearly insatiable demand for chips has driven up semiconductor stocks. An index tracking the sector surged 65% last year. Because of that, most semiconductor companies trade at rich valuations.

However, the current focus of the AI frenzy on semiconductor businesses has many investors overlooking two other sectors poised for explosive AI-powered growth: data centers and renewable energy. Here’s how to cash in on these under-the-radar AI plays.

A “once-in-a-generation” opportunity

Demand for data center capacity was already robust before AI burst on the scene. It’s one of four demand drivers (the mass production of data, the exchange of data, the cloudification of IT, and generative AI) that are powering “a once-in-a-generation investment cycle for data centers at the moment,” stated Felix Chan at Brookfield Infrastructure’s (NYSE: BIPC)(NYSE: BIP) investor day late last year. “We estimate that we will need over a trillion dollars over the next 10 years to invest in data centers to ensure that there is sufficient infrastructure for the growth in data consumption,” Chan added.

Investors can pick from among several companies that are poised to cash in on robust demand for data infrastructure, among them:

Equinix (NASDAQ: EQIX): The leading data center REIT (real estate investment trust) expects to invest $3 billion on capital expenditure projects annually through 2027 to expand and maintain its global platform. These investments position the company to grow its revenue by 8% to 10% per year to around $12 billion by 2027. The REIT’s growing cash flow should support more than 10% annual dividend growth during that time frame.
Digital Realty (NYSE: DLR): The data center REIT has been lining up partners to help it fund new data center developments. It signed a $7 billion development deal with private equity giant Blackstone, formed a smaller joint venture with diversified REIT Realty Income on build-to-suit facilities, and brought on another partner with Brookfield Infrastructure for their data center joint venture in India. On top of that, the REIT continues to “evolve our portfolio to capture the tremendous opportunities created by AI,” said CEO Andy Power in its fourth-quarter earnings press release. Digital Realty’s partnerships and portfolio put it in a strong position to capitalize on AI-powered demand growth.
Brookfield Infrastructure: The diversified infrastructure operator has spent several years building a global data center platform. It has made three data center investments over the past year to enhance its ability to capitalize on this megatrend. It’s investing heavily to build additional data center capacity around the world.

Data centers need power (and AI requires even more)

Data centers devour electricity. According to the U.S. Department of Energy, they consume 10 to 50 times the energy per square foot of floor space as a typical office building. Data centers currently use 2% of the country’s electricity.

AI applications consume even more power. “The highly power-intensive nature of AI is acting as a multiplier on energy demand, which is increasingly becoming a key bottleneck for growth of cloud computing,” wrote Connor Teskey, CEO of Brookfield Renewable (NYSE: BEPC)(NYSE: BEP) in his fourth-quarter letter to investors. “For example, the integration of AI uses up to ten times more power when integrated into a typical search process.”

Because of that, Teskey believes “most investors have yet to grasp the importance of a secure energy source in being able to deliver data center and computing power growth.” Currently, estimates suggest that global electricity demand by data centers will grow from 2% today to 10% by 2030. To meet this need, the world would have to add the equivalent of the current generating capacity of the U.S. power grid.

Many technology companies have pledged to power their data centers with renewable energy. They’re increasingly partnering with leading renewable energy developers to ensure they will have the power to continue growing their data center capacity. That should fuel growth for the top renewable energy companies, including:

Brookfield Renewable: Brookfield Renewable has become the partner of choice for companies seeking to decarbonize their operations. It often works directly with large technology companies to develop renewable energy projects to power their data centers and other operations. It entered 2024 with 155 gigawatts (GW) of projects in various stages of development, several times its current operating capacity.
NextEra Energy (NYSE: NEE): NextEra Energy is a leading wind and solar energy producer. It secured a record 9 GW of new projects last year, growing its total backlog to 20 GW. AI and data centers are among many trends driving the company’s belief that the U.S. will need to invest $4 trillion by 2050 to fully decarbonize its economy.

Powerful megatrends

AI is driving a lot of demand for semiconductors these days. However, that’s only part of the AI growth story. The megatrend will also propel significant incremental demand for data center capacity and renewable energy. That gives investors several under-the-radar ways to cash in while others focus on highly valued semiconductor stocks.