Artificial intelligence (AI) dominates the stock market headlines, and the energy companies powering the technology could be sound investments for those looking for a reliable means of exposure.
Many investors are increasingly concerned about the amount of investment being poured into AI infrastructure, and energy stocks could be one means of maintaining exposure to the theme without over-investing in some of the market’s more over-saturated stocks.
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But the downside risk if the AI rally is set to continue leads to significant FOMO. AI appears to be having a dramatic impact across all areas of business, and investors won’t want to be left out of any potential future gains.
“Regardless of your standpoint on the AI stocks valuation debate, there is an alternative way for investors to gain exposure to this monumental growth sector,” says Nick Lawson, founder and CEO of Ocean Wall. He says that this approach hinges around identifying the key bottleneck for the industry.
“That bottleneck is power,” said Lawson.
How much energy does AI use?
Data centres are the fastest-growing consumers of energy in the US. Analysis from Goldman Sachs suggests that data centres will account for 11% of all US power demand by 2030, up from 4% in 2023. AI data centres are expected to account for 39% of total data centre power demand by that time.
That demand could lead to energy supply being seriously stretched. Morgan Stanley analysts predict a US power shortfall of 44 gigawatts (GW) by 2028.
Bridging that gap will require the deployment of innovating “time-to-power” solutions such as natural gas turbine transactions, nuclear reactors or private fuel cells.
That same bottleneck is playing out across the world.
“In the UK, new data centres will have to be developed in sites that can connect to the power grid and be supplied with reliable and, ideally, low-carbon energy,” says Ashley Thomas, infrastructure & renewables research analyst at Winterflood Securities.
“This means that securing power and a grid connection has become vital when evaluating a data centre location or project,” Thomas added.
“In a market defined by scarcity of power – and scarcity of time – astute entrepreneurs are spotting the opportunity, and investors alive to their vision are piling in,” said Lawson.
How to invest in AI energy
Lawson highlights Fermi America (LON:FRMI) as one of the most promising AI energy investments. It is developing private grids, in recognition of the inability of the US or European grids to supply power on the scale and with the reliability that AI requires.
“Their solution is an 11-GW hybrid campus in Amarillo that combines clean natural gas, solar power, battery storage, nuclear baseload and fibre-rich connectivity directly beside the next generation of data-centre clusters,” says Lawson.
Fermi’s stock has nosedived since its 2 October IPO, but Lawson attributes this largely to the market over-reacting to a three week delay in the first $150 million payment from a prospective client.
“As big tech begins treating energy as strategic infrastructure, Fermi, and other companies that take its lead, will emerge as the investable bridge between digital demand and physical power, and one of the few ways to gain pure-play exposure to the US AI-energy nexus,” says Lawson.
But Fermi’s volatility shows the risks in investing directly in this market. It can pay to invest in AI energy stocks through an investment trust. This offers exposure to smaller, sometimes private companies that can be harder to invest in directly, as well as offering the expertise of an active manager researching the individual investments.
“The closed-ended investment trust structure is particularly well-suited for investing in hard to sell assets like data centres and energy infrastructure,” said Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC). “Investors can buy and sell their shares on the stock market while their fund managers can take a long-term approach to their portfolio.”
Ben Newell, analyst at Investec, highlights Pantheon Infrastructure (LON:PINT) as one potential option.
“Pantheon Infrastructure’s exposure extends through its power and renewables holdings,” says Newell. These include Calpine, a major gas-fired power producer, and Intersect Power, a US renewables developer.
“Both are well-positioned to benefit from rising energy demand driven by the demand for [AI] data centres,” said Newell.
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