“Amid explosive demand, America is running out of power.”
— The Washington Post, March 7, 2024
The stock market has fallen in love with artificial intelligence (“AI”). At the center of this are companies dubbed the “Magnificent 7” — Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla.
These seven companies have accounted for a dramatic portion of market returns in recent times.
Bloomberg reported that these seven stocks were up more than 75% in 2023 — with the benchmark S&P 500 up a smaller but still impressive 24%.
From 2019 to 2023, the seven were up 271% (compared to 90% for the broader S&P 500).
Chip maker Nvidia, the current darling of Wall Street, was up an eye-popping 1383% for the four years 2019-2023.
At least a big part of these returns came from expectations for almost revolutionary economic changes due to AI.
Besides all the debate about the potential for both good and evil with AI, there are serious concerns about the insatiable demand for electricity required by this new technology.
Where is all the power going to come from?
AI is driving a nationwide data center boom. According to the International Energy Agency, data centers and communications networks account for 2%-3% of annual global power consumption.
And that could triple by 2030 because of AI demand, according to a study by Boston Consulting Group.
I recall hearing about “the cloud” several years ago, and then seeing it firsthand as a sprawling mass of warehouses holding huge computer systems in Quincy, Washington.
This area had long been a major agricultural center, but the data centers located there for one very simple reason: proximity to hydroelectric power along the mighty Columbia River, which provides lots of cheap power.
But the spiraling demand for more power is driving tech companies to search for more power — lots more — any way they can get it.
The Magnificent 7 — and many other lesser-known companies — are scouring the nation looking for sites for new data centers, and power to run them.
These companies are scrambling to try to squeeze more power out of existing sources, and are even building their own power plants.
Amazon, Google and Microsoft have already invested in hundreds of solar and wind power projects.
Google just recently added a 400-megawatt power purchase contract to support its $1 billion new data center in Kansas City, Missouri.
Microsoft is reported to be looking at next-generation nuclear reactors to power its data centers and AI.
In March, Talen Energy announced a $650 million deal with Amazon Web Services to sell a data center powered by one of the largest U.S. nuclear plants in Pennsylvania.
And Google helped Fervo Energy build a “first-of-its-kind,” enhanced, geothermal power plant in northern Nevada.
As you might suspect, this is causing battles over who gets existing power, how in the world to meet rapidly rising demand and, of course, who is going to pay for it.
Regulators worry about the ability of utilities to meet the demand and are concerned that residential ratepayers (you and me) will get stuck with the bill for system upgrades.
And despite tech company efforts to seek clean energy, there are still concerns about the huge new demand stifling clean energy initiatives, with delayed retirement of fossil fuel plants and, locally, the extension of the Diablo Canyon nuclear power plant near Avila Beach.
For investors, the rising power demand has put a spotlight on utility stocks, which some think might be among the AI boom’s actual winners.
An Aug. 4 Fortune magazine article asked the question: “As AI gobbles electricity, is now the time to buy unloved utility stocks?”
Similarly, Morningstar featured a report “4 Utility Stocks to Play the AI Data Center Boom.”
And energy stocks have always been a favorite of Warren Buffett, representing 9.9% of Berkshire Hathaway’s portfolio.
My purpose in noting these thoughts is not to recommend any specific stocks — or even sectors — but rather to point out that winners in times of industrial change can often be hidden.
As an example, while automobile manufacturers came and went early on (and still do), the oil companies that powered the cars did pretty darn well.
If you were interested in making a bet on utilities, exchange traded funds (ETF) might be a simple and diversified way to do so.
For example, Vanguard Utilities EFT (symbol VPU) holds 66 stocks and has a low 10 basis points expense ratio.
There are other ETFs, including those offered by State Street and Northern Trust. Of course, always talk with your professional financial adviser about this and any other investment ideas.
Finally, a personal note. One of my sons left a big global public accounting firm to work for a utility company several years back. At first, he was concerned about being in a highly regulated and somewhat stodgy industry.
But now he finds himself involved in strategic planning in an exciting and rapidly growing business that is dealing with unprecedented demand.
My how things can change. I suspect we’re just seeing the beginning of truly unprecedented change in so many parts of life with AI — including how to power it.