2 'pick and shovel' ASX stocks to cash in on the AI megatrend
A group of miners in hard hats sitting in a mine chatting on a break as ASX coal shares perform well today
Artificial Intelligence (AI) is revolutionising industries globally, and ASX AI stocks are reaping the benefits.
Savvy investors are increasingly looking beyond the tech giants directly involved in AI to companies providing essential infrastructure and services.
According to TAMIM Asset Management, these companies are often referred to as the 'picks and shovels' play, a nod to the entrepreneurial types who sold shovels to miners during the gold rushes.
Let's explore two ASX stocks well-positioned to benefit from the AI boom: Southern Cross Electrical Engineering Ltd (ASX: SXE) and IPD Group Ltd (ASX: IPG).
ASX AI stocks in favour
Southern Cross Electrical Engineering is a prominent player in the Australian electrical contracting sector. It operates across the resources, commercial, and infrastructure markets.
While not directly involved in AI, it is well-placed to capitalise on the growing demand for data centres, as noted by TAMIM. Data centres are crucial for AI operations and require substantial electrical infrastructure.
The global data centre market is estimated to grow at a compound annual growth rate of 9.6% during the period 2023-2030, driven by the increasing adoption of cloud computing and AI technologies.
The market has recognised this potential. Southern Cross's share price surged nearly 140% in the past year, reflecting strong market demand for its services. It is "riding a wave of AI momentum," TAMIM notes.
Moreover, the company is expanding its business. Following its acquisition of MDE Group in June, management upgraded the ASX AI stock's FY24 EBITDA guidance to $53 million.
Data centres are electrically dense, with electrical work comprising the largest component of construction costs," according to TAMIM. The group has announced thirteen data centre awards totalling over $120 million in the last four years.
The company expects this growth to be sustainable, with further earnings growth anticipated in FY26 and beyond.
Beyond TAMIM, other experts are bullish on Southern Cross Electrical Engineering. It is rated as a strong buy according to the consensus of broker estimates on CommSec.
IPD is capitalising on AI infrastructure demand
IPD Group is an Australian distributor of electrical products and solutions. It plays a crucial role in energy management and automation.
As AI and data centres expand, IPG's services are becoming increasingly critical, putting it at the forefront of TAMIM's picks and shovels strategy. This, it says, could make it a potentially attractive ASX AI stock.
The company supplies essential electrical infrastructure products to the market. As noted by TAMIM, "IPD Group has demonstrated its capabilities in the data centre space by successfully completing projects such as supplying low-voltage switchgear for the Stack data centre."
IPG expects robust earnings growth, with FY24 EBITDA projected between $39 million and $39.5 million. According to my colleague Kate, the company could benefit from power shortages caused by AI-related demand.
The company has already completed several large data centre projects. TAMIM says this could be a tailwind as demand for cloud computing increases.
[IDP's FY 2024] guidance reflects the company's strong performance and the positive impact of its recent acquisitions, including EX Engineering and CMI Operations, which have strengthened its electric vehicle infrastructure team and expanded its customer reach.
In addition to TAMIM, Bell Potter analysts have a buy rating on IPD Group, with a $5.60 price target. According to CommSec, the consensus broker rating is a strong buy.
ASX AI stocks come in many shapes and sizes
Investing in 'picks and shovels' ASX AI stocks could be a sound strategy. Stocks like Southern Cross Electrical Engineering and IPD Group provide essential electrical infrastructure and services, positioning them as indirect beneficiaries of the AI revolution.
As always, consider your own personal financial circumstances before investing.
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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Ipd Group. The Motley Fool Australia has positions in and has recommended Ipd Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.