Investors seeking unique ways to enter the stock market amid the AI boom are finding profit opportunities in the traditionally most boring utility stocks.

Artificial intelligence is a recent buzzword. From related equipment manufacturers to automobile companies, they are trying to paint themselves full of future colors. As investors have seen this past week, it has also fueled the recent rise in the stock market.

Thursday Meta Platforms Inc. The stock price recorded its worst performance since October 2022. Earlier, the company said it would invest far more than expected to develop artificial intelligence. On Friday, Google parent company Alphabet Inc. It soared to a market capitalization of $2 trillion. Meanwhile, Microsoft has made progress in artificial intelligence in their quarterly results, and its stock price has risen in response.

But the problem with artificial intelligence technology is that it requires significant amounts of energy to maintain development and operation. This provides a useful place for utilities.

“Data centers already have a huge demand for electricity, and then the hype about artificial intelligence has caused the demand for electricity to soar.” Manju NaglaPurunisys, senior vice president and general manager of cloud computing, application and infrastructure solutions, said.

The utilities sector of the S&P 500 index fell 10% against the backdrop of a 24% sharp rise in the market in 2023, making it the worst performing stock index in the index. Overall, this isn't surprising, given that these companies tend to underperform during periods when interest rates continue to be high.

In 2024, these stocks picked up somewhat, rising 4.4%. Increased refinancing expenses and record capital expenses were offset by cost controls. But the biggest change in confidence in utility companies is the surge in demand for power consumption in data centers required for AI expansion.

The biggest driving factor

“Stories about artificial intelligence have attracted the interest of the biggest investors.” Ryan Levine said. “It has the potential to be the biggest driver of the industry.”

Utility companies across the US are preparing for historic power demand growth led by data centers and artificial intelligence. Even outside of Data Center Alley in northern Virginia, Dominion Energy suspended a new data center grid connection plan in 2022 due to grid restrictions. The companies are planning new power plants and transmission lines.

Calvin Butler, CEO of Exelon, recently stated: “Artificial intelligence is poised to help drive a 900% increase in electricity demand, and a data center in the Chicago area alone could require about four nuclear power plants. Southern predicts that the annual growth rate of its electricity sales will rise to 6%, with about 80% coming from data centers.

This explains why Goldman Sachs has set up two investment baskets: Power Up America and Data Center Equipment — precisely for customers looking for other ways to cope with the upcoming explosion of artificial intelligence. Although the bank did not disclose the shares in its basket, it selected companies based on four categories: unregulated and regulated utilities, smart grid infrastructure, and raw materials for power generation.

“We think these topics, and Goldman Sachs's broad AI basket, will be the most popular investment topics in the next few years,” Faris Mourad, vice president of Faris Mourad, who is responsible for custom baskets in the US, said in a telephone interview

Starting this year, the Power Up basket increased by nearly 28%, and the Data Center Equipment basket by more than 18%. Considering that the S&P 500 (S&P 500) technology sector, which generally performs well, rose by only 8.3% in 2024, the communications services sector, including social media companies, was the best performing sector in the index, and the increase was only 17%. This is a very high set of numbers.

Meanwhile, Mourad expects the 2024 year-end earnings of the Power Up America basket to be 21% higher than the initial forecast in January 2023. He believes there will be more gains in the future.

Expanding sources

Energy availability is a key consideration when data center operators decide where to build. Usually, they go to the local utility company to discuss how much electricity they need, and the utility company then seeks approval to build a new plant or buy electricity from a third party. For example, Georgia Power, the largest subsidiary of the utility holding company Southern, recently received approval from the Georgia Public Service Commission to expand its production capacity by 1.4 GW to meet the needs of data centers and other businesses.

“We recommend buying Southern for this reason.” Citigroup's Levine said.

Access to renewable energy is also an advantage. Aaron Dunn, co-head of Morgan Stanley Investment Management Value Equities and portfolio manager, is optimistic about NextEra Energy Inc. , because it has its own utility sector, produces renewable energy and develops renewable energy for other utility sectors.

“We believe renewable energy and storage are key factors to help meet this growing demand,” NexTERA CEO John Ketchum said during the company's first-quarter earnings call on Tuesday. “The potential of the US renewable energy and storage market in the next seven years is likely to triple that of the past seven years.”

As data center developers look for cheaper locations, Dunn expects the Midwest to become a center of activity because land prices in this area are cheaper than the rest of the US. It also benefits companies like CMS Energy Corp.” he mentioned.

In fact, CMS Energy Corp. said on Thursday's results conference call on its website that the company has signed a new 230-megawatt data center contract. Other companies are also looking to build data centers in Michigan.

Of course, all of this demand will only benefit utilities if they can produce enough electricity to meet the demand. Many energy experts worry that the US grid isn't ready for the big waves that are coming. This has led some investors to turn to companies that will be introduced to strengthen the grid so that utilities can adapt to the new high-energy environment.

“This will be a real challenge for traditional utilities”. Walter Todd, Chief Investment Officer of Greenwood Capital Associates said. His company holds shares in Eaton Corp. and Hubbell Inc. “The real beneficiaries of data center power usage are those who will benefit from funding to upgrade the grid.”