Investing in the AI Data Center Boom Beyond Big Tech
The data center boom is driving significant investment opportunities beyond the usual big tech names like Microsoft and Nvidia. While data centers face criticism for environmental and community impacts, their expansion remains crucial for AI growth. President Donald Trump even highlighted this trend in an August 31 Truth Social post, urging communities to 'let Data Reign.'
A Lawrence Berkeley National Laboratory report revealed that data centers consumed 4.4% of U.S. electricity in 2023, with projections suggesting this could rise to between 6.7% and 12% by 2028. This surge in demand is creating opportunities for companies that provide essential services to data centers, such as Digital Realty, Vertiv, and Quanta Services.
Digital Realty (DLR) is a major player in the data center real estate market, operating as a real estate investment trust (REIT). The company reported a record $1.4 billion in annualized base rent at the end of the second quarter, with a 25.4% cash increase on renewal leases. However, building data centers is costly, and higher borrowing and construction costs could impact profitability.
Vertiv Holdings (VRT) specializes in power-distribution equipment, battery backups, switchgear, and cooling systems. The company's second-quarter sales were up 24% compared to the previous year, and its stock had risen about 75% over the previous 12 months as of Sept. 16. Vertiv's success hinges on its ability to execute well, as delays or reduced AI spending could pressure the stock.
Quanta Services (PWR) focuses on building and upgrading transmission lines, substations, and electrical systems for large facilities, including data centers. The company reported second-quarter revenue of $9.56 billion, up from $6.77 billion the previous year. While data centers are part of Quanta's business, its broad client base provides some protection against slowdowns in AI-related construction.