Goldman Sachs: escalating electricity needs from running AI data centers will generate downstream investment opportunities that will benefit utilities, renewable energy generation, and industrial sectors.
The surge in power demand is anticipated to be met by approximately 60% gas and 40% renewable sources.
Our top 5 picks from a basket of Goldman Sachs selected stocks include tech, utilities and infrastructure solutions.
The U.S. and the world in general are living through the Fourth Industrial Revolution with Artificial Intelligence (AI), clean energy and cryptocurrencies emerging as some of the biggest secular megatrends of our time. According to Goldman Sachs, escalating electricity needs from running AI data centers will generate downstream investment opportunities that will benefit utilities, renewable energy generation, and industrial sectors. The investment bank has forecast that data center power demand will grow at 15% compound annual growth rate from 2023-2030, with data centers consuming 8% of total U.S. electricity output at the end of the foreast period compared to ~3% currently. Analysts estimate that ~47 GW of additional power generation capacity will be required to meet the growth in U.S. data center power demand by 2030.
The “U.S. power demand (is) likely to experience growth not seen in a generation. Not since the start of the century has US electricity demand grown 2.4% over an eight-year period, with US annual power generation over the last 20 years averaging less than 0.5% growth,” Goldman Sachs projected.
The surge in power demand is anticipated to be met by approximately 60% gas and 40% renewable sources and drive ~$50 billion in capital investment in U.S. power generation capacity by 2030.
Goldman Sachs has picked a basket of 16 stocks across various sectors, including Utility, Clean Technology, Midstream, Energy Services, Industrials, and Industrial Tech set to benefit from the AI data center power boom. Here are our top picks.
Power Demand Growth Beneficiaries:
Vertiv Holdings Plc
Market Cap: $37.2B
12-Month Returns: 498.4%
Vertiv Holdings Co. (NASDAQ:VRT) together with its subsidiaries, designs, manufactures, and services critical digital infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments. This Ohio-based manufacturer of power and cooling equipment for data centers has a solid market presence in thermal cooling and power management offerings.
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Recently, Bank of America (BofA) touted VRT as the real winner in the AI race, highlighting the stock’s roughly ~300% outperformance of Nvidia Corp.’s (NASDAQ:NVDA) shares since the graphics processing units maker released its blowout Q1 results on May 24, 2023. VRT shares have rocketed 511% since that date.
“AI investment isn’t just about GPUs, but also power. GPUs need 2-2.5x more power than CPUs, and expected power usage for US data centers under construction is equivalent to more than 50% of the power currently used by US data centers,” Ohsung Kwon, equity & quant strategist at BofA Securities, said in a Monday note.
Cameco Corporation
Market Cap: $23.0B
12-Month Returns: 92.1%
Saskatoon, Canada-based Cameco Corporation (NYSE:CCJ) provides uranium for the generation of electricity. In a sudden reversal of fortunes, the U.S. uranium industry has lately been receiving plenty of federal support. CCJ and its uranium peers have been surging following news that the U.S. government will ask companies to bid next month on contracts for as much as $3.4B of domestically produced nuclear reactor fuel. Last month, the Biden administration banned the importation of low-enriched uranium (LEU). The ban, which is expected to be signed by President Joe Biden, starts 90 days after enactment and will remain active until 2040.
The Biden administration has also been supporting the development of Advanced Small Modular Reactors (SMRs). According to the DoE, Advanced SMRs offer many advantages, such as relatively small physical footprints, reduced capital investment, ability to be sited in locations not possible for larger nuclear plants, and provisions for incremental power additions. SMRs also offer distinct safeguards, security and nonproliferation advantages.
Power Generation Capacity Additions:
GE Vernova
Market Cap: $44.1B
12-Month Returns: 25.3%
Incorporated in 2023 after being spun off by General Electric (NYSE:GE), GE Vernova (NYSE:GEV) is an energy equipment manufacturing and services company headquartered in Cambridge, Massachusetts. The company operates under Power, Wind, and Electrification segments. The company is well positioned to profit from sustained growth trends as a supplier of power generation assets.
In its first ever post-spinoff report, GE Vernova reported a larger-than-expected Q1 adjusted loss of $0.41/share, as demand for natural gas-related equipment and services was offset by weakness in its wind segment. Wind segment fell 40% on lower demand for onshore equipment but sales in the power segment rose 6% on higher orders for gas turbines and more demand for gas power services due to outages. The company reiterated its full-year revenue guidance of $34B-$35B, and said it expects cash generation will “improve meaningfully every quarter this year.”
Power Infrastructure Investment Needs:
Quanta Services Inc.
Market Cap: $39.2B
12-Month Returns: 59.3%
Quanta Services Inc. (NYSE:PWR) provides infrastructure solutions for the electric and gas utility, renewable energy, communications, and pipeline and energy industries in the United States and international markets. This specialty contractor is poised to reap rewards from increased electricity demand.
Three weeks ago, Qantas reported Q1 2024 Revenue of $5.03B, good for +13.5% Y/Y while Q1 non-GAAP EPS of $1.41 beat the Wall Street consensus by $0.12.
“Utilities across the United States are experiencing and forecasting meaningful increases in power demand for the first time in many years, driven by the adoption of new technologies and related infrastructure, including artificial intelligence and data centers, as well as federal and state policies designed to accelerate the energy transition,’’ the company said in its latest earnings call.
Industrial Supply Chain Beneficiaries:
Eaton Corporation
Market Cap: $133.2B
12-Month Returns: 93.4%
Eaton Corporation (NYSE:ETN), a global intelligent power management company, is poised to capitalize on the sustained increase in power demand. In its latest quarterly report, the company announced Q1 2024 EPS of $2.04, a first quarter record and up 28% over the first quarter of 2023 while revenue of $5.9B was good for +7.7% Y/Y growth. Segment margins were 23.1%, a first quarter record and a 340-basis point improvement over the first quarter of 202. Eaton’s management raised full year 2024 organic sales, segment margin, earnings per share and adjusted earnings per share guidance.
“Growth drivers like increased project activity tied to megatrends, reindustrialization and infrastructure spending continue to drive demand for Eaton’s solutions across our markets, and we remain very confident in our teams’ ability to execute on our increased targets for the year. We capitalized on strong growth in our business to start the year, resulting in strong order growth in Electrical and Aerospace and first quarter record segment margins, ” Craig Arnold, Eaton’s chairman and CEO said.
By Alex Kimani for Oilprice.com
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