Brad’s Note: Every Friday, we share insights and analysis from my team behind the scenes at Wide Moat Research. I’ve worked with these analysts for years, and they are among the best in the business.
Today, we’ll share an insight from Nick Ward, equity analyst with Intelligent Income Investor. I’ve worked with Nick for almost a decade now. He’s been with us since the beginning of Wide Moat Research and his coverage spectrum spans a variety of sectors, including technology.
As Nick shares below, there’s an unexpected investment trend taking shape amidst the race for artificial intelligence (AI) supremacy. It’s an opportunity that very few investors have considered. Read on.
By Nick Ward, Analyst, Wide Moat Research
Mark Twain was a notoriously bad investor.
He lost money on a long list of investments, including real estate, railroad stocks, steam pulleys, and magnetic telegraphs.
I don’t know much about steam pulleys and telegraphs, but I can confidently say this… It’s hard to lose money on railroad stocks over the long-term.
Fortunately for Twain, he was also a prolific writer, one of the highest-paid in the 19th century. And he married a coal heiress (that never hurts). Because of this, he had no shortage of income.
Unfortunately for Twain, he was prone to exuberance and excessive risk taking. He admitted once to his editor that, “I must speculate in something. Such being my nature.”
You’d think that this level of self-awareness would have helped him avoid losses. But it didn’t stop him from losing several fortunes during his lifetime.
Sometimes, an investor is his own worst enemy…
It wasn’t until later in life – when he was wiser and poorer – that he finally concluded that, “There are two times in a man’s life when he should speculate: when he can’t afford it and when he can.”
Despite his numerous financial failures, Twain is also attributed with a quote that has helped investors generate trillions of dollars of wealth: “During the gold rush it’s a good time to be in the pick and shovel business.”
Investors are likely familiar with the idea of “picks and shovels.” Individual gold miners might go broke, but the companies behind the scenes – the suppliers – they tend to do quite well.
We’re seeing a modern-day gold rush play out right now with artificial intelligence (AI). Many investors are speculating on which company will win the race for AI supremacy.
At Wide Moat Research, we’re asking a different question: Who’s supplying the picks and shovels?
The Company That Struck Gold
Twain would probably love Nvidia stock. In recent years, we’ve seen Nvidia become one of the largest companies in the world by selling advanced graphics processing units (GPUs), which are ideal for artificial intelligence applications.
And credit where it’s due, Nvidia has earned its success.
During the company’s latest earnings, Nvidia announced quarterly revenue of $26 billion, up 262% in one year. Data center revenue was up 427% year-over-year. For a company as large as Nvidia – the market capitalization was $2.3 trillion going into earnings – these types of results are unprecedented. And it’s propelled the stock nearly 200% in the past 12 months.
Now, having said all that, you might be surprised to hear that it’s not a stock we would recommend to our subscribers.
The company has a commanding presence in the GPU market, analysts at Wells Fargo estimate its market share of data center GPUs could be as much as 98%.
That’s unheard of. Nvidia is printing money right now with gross margins north of 75%. But that won’t last forever. It can’t. The market won’t allow it. In the notoriously competitive semiconductor space, others will find a way to eat away at that market share.
Nvidia is the company that struck gold, and we tip our hats. But we feel there’s a better way forward.
A Tsunami of New Energy Demand
You might be surprised to learn that asking ChatGPT a single question consumes 10x the amount of energy compared to a typical Google search. The type of computation performed by generative AI might seem like magic. But that process must happen somewhere. And that “somewhere” is in data centers around the country and world.
And that means a demand for energy… a lot of it.
A recent analysis from Scientific American put the numbers into perspective. Currently, data centers account for approximately 1-1.5% of global electricity demand. That’s relatively small, but it’s set to grow.
The analysis goes on to estimate that Nvidia alone could ship as many as 1.5 million AI server units by 2027. Running at full capacity, they would demand some 85.4 terawatt-hours of electricity each year. For perspective, the country of Colombia generated 87.2 terawatt-hours last year.
The analysis put it another way: If every single interaction with Google’s search was transformed into chatbot interaction like ChatGPT, then Google would need as much power as Ireland to simply run that feature.
Obviously, that won’t happen overnight. The hardware investments from Google would be immense. But the writing is on the wall. AI is introducing a tsunami of new energy demand. And if an AI future has any hope of materializing, that power has to come from somewhere.
Utilities: A Safer Alternative to Speculative Tech
At Wide Moat Research, we’re currently investigating the opportunities in utility companies with exposure to new data centers used for AI applications. Utilities might not be as exciting as investing in AI chips, but there’s a lot to like about the stocks.
Utilities tend to be less volatile than technology stocks. A competitor might find a way to take market share from Nvidia, but a regulated utility company is a legal monopoly. The barrier to entry is too high, too onerous, for anybody to attempt to compete with established companies in a region.
For another, utilities tend to be reliable and generous dividend payers. Many utilities payout as much as 80% of earnings to investors. And because of the stable nature of the business, these payments tend to be very reliable. And they tend to rise reliably.
If you can stomach a lot of volatility, then Nvidia might still be a great investment. But there are alternatives with much lower risk that also offer strong total return profiles.
When I think about the artificial intelligence industry, there’s only one thing that I’m certain about…
It’s going to take an incredible amount of electricity to power all the data centers responsible for AI’s proliferation.
This is the trend that I want to capitalize on (without excess risk or speculation).
That’s exactly what we’re doing in the upcoming issue of the Intelligent Income Investor. On Monday, Brad will highlight our favorite stock from the utility sector right now.
It’s an underappreciated company servicing a region set to see new data center construction. And we want to own it before the market realizes its potential.
So, paid up subscribers should be on the lookout for your June issue, set to publish Monday afternoon. We’ll speak to you again then.
Regards,
Nick Ward
Analyst, Wide Moat Research