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Underappreciated Industry Benefits from AI Buildout
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AI Requires Data Centers
Data centers are integral to the AI buildout because they yield the computational power and storage necessary for training and deploying large language models like OpenAI and Microsoft’s ((MSFT - Free Report) ) “ChatGPT,” and Alphabet’s ((GOOGL - Free Report) ) “Bard” at scale. Running an LLM requites facilities that house numerous servers and specialized hardware optimized for tasks such as deep learning. Unfortunately, these complex systems require a ton of energy due to their intense processing demands and the persistent need for temperature (cooling) regulation.
Growth is Still in the Early Innings
According to a new report by Bloomberg Intelligence, “The generative AI market is poised to explode, growing to $1.3 trillion over the next 10 years from a market size of just $40 billion in 2022. Growth could expand at a CAGR (Compound Annual Growth Rate) of 42%, driven by training infrastructure in the near-term and gradually shifting to inference devices for large language models, digital ads, specialized software and services in the medium to long term.”
Image Source: Bloomberg Intelligence
The Race is On
In the capitalist system of America, companies are jockeying for position and rushing to catch up to LLMs such as ChatGPT, the current market leader. Meanwhile, the race for AI supremacy is not only domestic. China, America’s most significant economic adversary, is behind the U.S. in terms of AI but is racing to catch up (and has a larger talent pool to choose from). Finally, the oil-rich and deep-pocketed nation of Saudi Arabia is allocating at least $40 billion to join the fight.
During a Gold Rush, Sell the Shovels
When so much competition exists in a high-growth market, it can muddle the picture for investors. For example, thousands of companies went bankrupt during the internet craze, while only a few became dominant. How can investors parse through the noise?
“During a gold rush, sell shovels.”
Samuel Brannan became the first millionaire of the Gold Rush, but not for the reasons you might expect. Brannan capitalized on the frenzy by providing miners with shovels, picks, and pans.
When oil fracking exploded a handful of years ago, an unexpected industry took off: RV makers, because fracking took place in remote locations with little housing, companies like Winnebago Industries ((WGO - Free Report) ) took off as oil companies filled the housing void using RVs.
Utilities: An Underappreciated Group
The most well-known company selling the “shovels” to the AI gold rush is Nvidia ((NVDA - Free Report) ). However, the utility/energy industry may have an even longer runway than many AI names. Picking winners will become more difficult as the number of competitors in the industry snowballs. That said, the one constant will be the need for energy production.
For example, Vista Energy ((VST - Free Report) ), which offers electricity and power generation, is up 113.7% over the past year, trouncing the S&P 500 Index’s gain of 17.2% over the same period.
Image Source: Zacks Investment Research
Meanwhile, Constellation Energy ((CEG - Free Report) ) holds a coveted Zacks Rank #2 (Buy), and analysts see earnings growing by an explosive 551.72% next quarter!
Image Source: Zacks Investment Research
The two stocks mentioned, and fellow industry leader NRG Energy ((NRG - Free Report) ) are currently extended. However, they would provide solid reward-to-risk on a deeper pullback (to the 50-day moving average).
Bottom Line
Picking winners in a hot industry like AI can be challenging as the competition is fierce. Nevertheless, the one constant is that the proliferation of AI will require a plethora of new energy production.
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Underappreciated Industry Benefits from AI Buildout
AI Requires Data Centers
Data centers are integral to the AI buildout because they yield the computational power and storage necessary for training and deploying large language models like OpenAI and Microsoft’s ((MSFT - Free Report) ) “ChatGPT,” and Alphabet’s ((GOOGL - Free Report) ) “Bard” at scale. Running an LLM requites facilities that house numerous servers and specialized hardware optimized for tasks such as deep learning. Unfortunately, these complex systems require a ton of energy due to their intense processing demands and the persistent need for temperature (cooling) regulation.
Growth is Still in the Early Innings
According to a new report by Bloomberg Intelligence, “The generative AI market is poised to explode, growing to $1.3 trillion over the next 10 years from a market size of just $40 billion in 2022. Growth could expand at a CAGR (Compound Annual Growth Rate) of 42%, driven by training infrastructure in the near-term and gradually shifting to inference devices for large language models, digital ads, specialized software and services in the medium to long term.”
Image Source: Bloomberg Intelligence
The Race is On
In the capitalist system of America, companies are jockeying for position and rushing to catch up to LLMs such as ChatGPT, the current market leader. Meanwhile, the race for AI supremacy is not only domestic. China, America’s most significant economic adversary, is behind the U.S. in terms of AI but is racing to catch up (and has a larger talent pool to choose from). Finally, the oil-rich and deep-pocketed nation of Saudi Arabia is allocating at least $40 billion to join the fight.
During a Gold Rush, Sell the Shovels
When so much competition exists in a high-growth market, it can muddle the picture for investors. For example, thousands of companies went bankrupt during the internet craze, while only a few became dominant. How can investors parse through the noise?
“During a gold rush, sell shovels.”
Samuel Brannan became the first millionaire of the Gold Rush, but not for the reasons you might expect. Brannan capitalized on the frenzy by providing miners with shovels, picks, and pans.
When oil fracking exploded a handful of years ago, an unexpected industry took off: RV makers, because fracking took place in remote locations with little housing, companies like Winnebago Industries ((WGO - Free Report) ) took off as oil companies filled the housing void using RVs.
Utilities: An Underappreciated Group
The most well-known company selling the “shovels” to the AI gold rush is Nvidia ((NVDA - Free Report) ). However, the utility/energy industry may have an even longer runway than many AI names. Picking winners will become more difficult as the number of competitors in the industry snowballs. That said, the one constant will be the need for energy production.
For example, Vista Energy ((VST - Free Report) ), which offers electricity and power generation, is up 113.7% over the past year, trouncing the S&P 500 Index’s gain of 17.2% over the same period.
Image Source: Zacks Investment Research
Meanwhile, Constellation Energy ((CEG - Free Report) ) holds a coveted Zacks Rank #2 (Buy), and analysts see earnings growing by an explosive 551.72% next quarter!
Image Source: Zacks Investment Research
The two stocks mentioned, and fellow industry leader NRG Energy ((NRG - Free Report) ) are currently extended. However, they would provide solid reward-to-risk on a deeper pullback (to the 50-day moving average).
Bottom Line
Picking winners in a hot industry like AI can be challenging as the competition is fierce. Nevertheless, the one constant is that the proliferation of AI will require a plethora of new energy production.