It’s been 16 months since ChatGPT burst onto the scene.
In a little over a year, the companies working on artificial intelligence (AI) technology have been supercharged and transformed.
Investors who got in on the AI trend early have already made a ton of money. Nvidia (NVDA) alone is up over 226% over the past year.
But the race to build bigger and better AI programs is far from over. In fact, in one unique sector, it may only just be starting up.
Companies are making big bets on building the infrastructure that AI will need to work: data centers.
Microsoft is planning to build an AI data center called “Stargate” that could cost up to $100 billion.
Amazon plans to spend $150 billion on data centers in the coming years.
And private equity firm Blackstone has built a $25 billion data center empire and has $65 billion of investors’ money to keep investing. It’s currently trying to buy Winthrop – one of Europe’s largest data center construction companies.
At Intelligent Income Daily, our goal is to find the best ways to generate safe income from the biggest market trends.
Today I’ll explain how AI is fueling a growing need for more data centers. I’ll also show you how to collect a reliable yield by owning these mission-critical assets as the world races into the future.
The Infrastructure AI Needs to Function
One of the key factors in AI development is having enough computing power. It’s also one of the biggest bottlenecks. Here’s why…
ChatGPT uses an AI model called GPT-4. Without getting too technical, it has more than a trillion parameters – or variables – that affect how the AI responds. To train the AI, each of those parameters must be optimized.
Basically, that means running a lot of calculations to figure out the best setting for each of those parameters.
As companies develop newer AI programs, they’ll include more parameters and use more data to train them. That means the amount of computing power needed will keep growing.
And that’s where data centers come in. Data centers are buildings that house computer systems and generate storage, computing power, and security for millions of remote clients. Including the biggest tech companies in the world.
And all those chips running AI programs will need to be kept in data centers that provide power, cooling, and high-speed internet connections.
There’s just one problem – the available supply of data center space can’t keep up with the huge demand for computing power coming from AI.
It takes years to build a data center. Plus, because of supply chain issues and data centers’ unique electrical, power, and cooling demands, construction is taking around four times longer than it used to.
And the best locations are running low on land and electricity. That’s causing a strong increase in data center rental rates.
According to real estate broker CBRE, data center rents have been rising at a double-digit pace since 2021.
Most of the new data centers finishing construction in 2024 are already spoken for. Which means companies looking to find space in data centers have to wait up to two years…
And that makes the companies that own and build data centers an attractive opportunity today.
One Way to Invest in AI’s Infrastructure
One company that’s setting up to be a big beneficiary of this growing trend is Equinix (EQIX).
Equinix is a real estate investment trust (REIT) and one of the largest data center companies in the world. Its portfolio includes 260 data centers on five continents in 33 countries.
Equinix has been building data centers for more than 20 years. That means it has already locked in many of the best locations in its portfolio.
That’s important because it gives the company many opportunities to expand its existing data centers without having to buy new land and wait for power and internet connections.
Equinix currently has 49 data center construction projects in progress.
And as a REIT, it’s required by law to pay out 90% of its taxable income to shareholders through dividends.
The company’s contracts include 2-5% rent increases each year, allowing it to keep up with inflation, which is around 3.15% right now.
Plus, as it builds more data centers, it can lock in even higher rental rates as a result of the AI boom. That means shareholders will continue to get reliable and growing income.
Equinix yields 2.1%. That may seem low, but the company is growing its dividend at a rapid pace. Last year, it increased its dividend by nearly 25%.
Shares are trading at under 24x adjusted funds from operations (AFFO). AFFO is a financial metric that tells shareholders how much cash flow a REIT has available for paying dividends.
Although Equinix has historically traded at 24x AFFO, it’s a fair price to pay for a company that’s helping provide the computing power desperately needed to meet the rapidly growing infrastructure demands of AI.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily