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“In the face of soaring demand, the United States is depleting its power supply.”
— The Washington Post, March 7, 2024
The stock market has developed a fascination with artificial intelligence (“AI”). At the core of this phenomenon are firms referred to as the “Magnificent 7” — Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia, and Tesla.
These seven firms have generated a substantial share of market gains in recent periods.
Bloomberg acknowledged that these seven shares increased by over 75% in 2023 — while the benchmark S&P 500 rose a lesser yet impressive 24%.
From 2019 to 2023, the seven experienced a 271% increase (in contrast to 90% for the wider S&P 500).
Chipmaker Nvidia, the current favorite of Wall Street, saw an astonishing rise of 1383% from 2019 to 2023.
A significant portion of these returns stemmed from the anticipation of nearly revolutionary economic transformations driven by AI.
Amid the discussions around the potential benefits and drawbacks of AI, there are substantial worries regarding the insatiable electricity needs associated with this emerging technology.
Where will all the power originate?
AI is fueling a nationwide boom in data centers. According to the International Energy Agency, data centers and telecom networks make up 2%-3% of annual global energy consumption.
This figure could triple by 2030 due to AI’s requirements, as stated in a report by Boston Consulting Group.
I recollect hearing about “the cloud” several years back, and then witnessing it firsthand as a vast expanse of warehouses housing immense computer systems in Quincy, Washington.
This region had historically been a significant agricultural hub, but the data centers emerged there for one straightforward reason: accessibility to hydroelectric power along the powerful Columbia River, which offers plentiful low-cost energy.
However, the escalating demand for extra electricity is propelling tech firms to hunt for more power — substantially more — by any means necessary.
The Magnificent 7 — along with numerous other less familiar companies — are combing the nation for locations for new data centers and the energy to operate them.
These firms are striving to extract more power from current sources and are even constructing their own energy facilities.
Amazon, Google, and Microsoft have already made investments in hundreds of solar and wind energy initiatives.
Google recently secured a 400-megawatt power purchase agreement to support its $1 billion new data center in Kansas City, Missouri.
Reports suggest that Microsoft is exploring next-generation nuclear reactors to supply power to its data centers and AI systems.
In March, Talen Energy unveiled a $650 million agreement with Amazon Web Services to provide a data center powered by one of the largest nuclear power facilities in the U.S. located in Pennsylvania.
Furthermore, Google contributed to Fervo Energy in the construction of a “first-of-its-kind,” enhanced geothermal power plant in northern Nevada.
As you might anticipate, this is leading to conflicts over existing energy allocations, how to accommodate the rapidly soaring demand, and naturally, who is going to bear the costs.
Regulators are anxious about utility companies’ capacity to meet demand and worry that residential consumers (you and me) will ultimately foot the bill for system upgrades.
And despite the technology firms’ endeavors to pursue clean energy, there remain concerns about the immense new electricity demand hindering clean energy projects, with the delayed cessation of fossil fuel plants and, on a local level, the continuation of the Diablo Canyon nuclear facility near Avila Beach.
For investors, the surging electricity demand has cast a spotlight on utility stocks, which some speculate might be among the genuine beneficiaries of the AI boom.
An Aug. 4 Fortune magazine article pondered: “As AI consumes electricity, is this the opportune moment to invest in overlooked utility stocks?”
Similarly, Morningstar published a report “4 Utility Stocks to Capitalize on the AI Data Center Surge.”
Energy stocks have always been a preference for Warren Buffett, comprising 9.9% of Berkshire Hathaway’s portfolio.
My intent in highlighting these insights is not to endorse particular stocks — or even sectors — but instead to emphasize that winners during industrial shifts can frequently be obscured.
For instance, while automobile manufacturers rose and fell early on (and continue to do so), the oil firms that fueled the vehicles fared quite well.
If you are keen on placing a wager on utilities, exchange-traded funds (ETFs) may provide a straightforward and diversified approach to do so.
As an example, Vanguard Utilities ETF (symbol VPU) includes 66 stocks and boasts a minimal 10 basis points expense ratio.
Additional ETFs are available, including those offered by State Street and Northern Trust. Naturally, always consult with your financial advisor regarding this and any other investment strategies.
Lastly, a personal reflection. One of my sons transitioned from a major global public accounting firm to work for a utility company several years ago. Initially, he was apprehensive about being in a heavily regulated and somewhat traditional industry.
However, he now finds himself engaged in strategic planning within a thrilling and rapidly expanding sector that is confronting unprecedented demand.
How things can shift. I believe we are just witnessing the onset of truly extraordinary transformations in numerous aspects of life with AI — including the means to power it.
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