Editor’s Note: Today, we’re sharing a special essay from our own Brad Thomas. In recent years, all eyes have been on artificial intelligence (“AI”), understandably so. But while most investors are laser-focused on Nvidia and other tech names, Brad sees another, less-obvious avenue into the AI trend. As he says it’s the “essential ingredient” in the new industrial revolution.
Markets are still on edge, eyes peeled for any announcements from the White House about the ongoing trade negotiations. But, just for today, let’s leave the world of tariffs and trade wars.
Today, I’d like to share an investment thesis that I’ve been publishing to members of The Wide Moat Letter. I’d recommend you take just five minutes to read it. Because, if I’m right, it could be one of the biggest investing stories of the next few years.
And it starts in a surprising place…
Carnegie’s Lesson
Andrew Carnegie was not born a rich man… but he certainly died as one.
Carnegie was born in 1835 in a small weaver’s cottage that they shared with a neighboring family in rural Scotland.
However, when industrialism made the home-based linen business of the day obsolete, his family fell on hard times. Andrew’s father lost his job, ultimately inspiring the family to immigrate to America when he was 13 years old.
Looking at his life story, it’s clear that Carnegie never forgot – or underestimated – the disruptive power of industrialization.
Upon his arrival in the U.S., Carnegie went to work, making $1.20/week as a bobbin boy at a cotton mill outside of Pittsburg.
Through his profound dedication, he worked his way up to being the superintendent of the Pennsylvania Railroad by the age of 24.
But Carnegie didn’t just want to work for the railroad, he wanted to own it.
Carnegie’s boss at the railroad kickstarted his investment career when he told him that 10 shares of the Adams Express Company were going up for sale.
At the time, the young man was making $35/week, but he mortgaged his house for the $500 he needed to buy the shares.
Next, he invested in sleeper railroad cars. Then, Carnegie used the money he made from the sleeper car business to invest in the Pennsylvania Rock Oil Company. Soon after, Carnegie pivoted again, retiring from the railroad business, and founded the Keystone Bridge Building Company.
He knew that iron was much better than wood for bridge building, but it wasn’t long before he discovered steelworks in England, and he quickly brought that technology to America.
Carnegie said, “[The] Iron Age would pass away, and the Steel Age [would] take its place,” and this foresight is what made him one of the richest men to ever live.
Carnegie used his profits to buy up competing steel mills. Ultimately, he created a monopoly in the U.S. steel business, and by 1900, his one company was outproducing the entire British steel industry.
It would be difficult to overstate how essential steel was at this time. America was undergoing a massive wave of industrialization with an insatiable demand for steel. And for the most part, Carnegie’s steel was what the country got.
The business was so profitable that in 1901, Carnegie sold to JP Morgan for $480 million (nearly $18 billion in today’s dollars).
The New Industrial Revolution
Flash forward 150 years, and the world is undergoing another transformation that promises to be on par with the Industrial Revolution of the late 19th and early 20th centuries.
That revolution, of course, is the adoption of artificial intelligence (“AI”).
By now, I’m sure you’ve heard plenty about AI. And I have no doubt you’re familiar with some of the biggest winners so far – Nvidia (NVDA), first and foremost.
I’m not here to tell you about that. And I’m not going to recommend buying NVDA or any other technology stock. That’s a crowded trade. And there are other, lesser-known avenues to gain exposure to this trend.
In many ways, the adoption of AI promises to be as disruptive as railroads and the larger industrial revolution of Carnegie’s age. But, like Carnegie, we’re interested in owning the essential ingredients in this new “AI railroad.”
For Carnegie, that essential ingredient was steel. For us, that essential ingredient is energy. Plain and simple.
More Power. Right Now.
Did you know that on average, asking ChatGPT’s AI a question requires about 10 times the amount of energy to process than a typical Google search?
Those AI queries are processed by power-hungry data centers. According to the Goldman Sachs report, by 2030, data-center electricity demand will represent roughly 8% of all power consumed in the U.S. (up from roughly 3%, currently).
A recent report on U.S. power consumption published by consulting giant McKinsey now expects to see 50 gigawatts (“GW”) of power consumed by data centers in 2030. To put that into perspective, 50 GW can power roughly 37.5 million homes.
That’s a 57% increase from McKinsey’s estimate from 2023. The fact is, just about everyone has underestimated the speed at which the major technology companies are building out their AI systems.
Moving forward, we wouldn’t be surprised to see these estimates continue to increase as hyperscalers continue to increase their capital expenditures.
The U.S. Department of Energy Efficiency and Renewable Energy states, “Data centers are one of the most energy-intensive building types, consuming 10 to 50 times the energy per floor space of a typical commercial office building.”
And while technology in the data center industry is getting more and more efficient as well, the growth of the industry is likely to far outpace any energy reduction advances that semiconductor companies make.
Nothing is ever a “sure thing,” not in life, and not in the markets. But expecting increased energy consumption over the next several years is probably the closest we’ll get.
Everywhere we look, we see energy and utility companies talking about this higher demand. Heightened energy demand is expected to result in strong cash flows for the companies that can provide that power.
And if you’re looking for relatively low-risk opportunities with great potential upside in the age of AI, investing in these power generators is one of my favorite strategies.
If you’re at all interested, I put together a presentation where I give details on my favorite AI-adjacent stocks to buy right now. You can learn more right here.
Regards,
Brad Thomas
Editor, Wide Moat Daily