Buy this boring part of the stock market for overlooked exposure to the AI boom

Matthew Fox
2 min read
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  • Boring utility stocks are being highlighted as the next great beneficiaries of the AI boom.

  • That's because the vast build-out of AI data centers is leading to a surge in electricity demand.

  • Goldman Sachs highlights 4 buy-rated utility stocks that are set to benefit from the AI boom.

The most boring area of the stock market is being awakened by the AI boom, and investors should take notice now, according to Goldman Sachs.

The bank highlighted utility stocks as a big beneficiary of the AI boom due to the soaring demand for electricity from AI-focused data centers.

"While investor interest in the AI revolution theme is not new, we believe downstream investment opportunities in utilities, renewable generation and industrials whose investment and products will be needed to support this growth are underappreciated," Goldman Sachs said in a note late last month.

Most utilities are regulated monopolies, and that regulation typically leads to low-to-mid single-digit annual growth rates, often driven by small rate increases every few years. It's a dependable area of the stock market that historically has offered investors low, but steady growth.

But the conventional thinking surrounding utility stocks is being turned on its head thanks to the growing adoption of AI, because it's leading to a surge in demand for electricity.

"We forecast a 15% CAGR in data center power demand from 2023 - 2030, driving data centers to make up 8% of total US power demand by 2030 from about 3% currently," Goldman Sachs said.

This has been evident in the recent price performance of utility stocks, with the sector up about 11% year-to-date, making it the third best-performing sector of the year so far, right behind the technology and communication services sectors.

These are the four utility stocks Goldman Sachs rates as Buy, partly due to their exposure to AI-fueled electricity demand.

Xcel Energy (XEL): "Regulated utility exposed to power generation needs to support data center growth in MISO."

NextEra Energy (NEE): "Renewable segment uniquely positioned for AI data load and interconnection queue available."

Southern Co. (SO): "Regulated utility regionally positioned to serve data center load growth via generation spend."

Sempra (SRE): "Utility that is spending significant capex on T&D to support data center growth in Texas."

"US power demand likely to experience growth not seen in a generation. Not since the start of the century has US electricity demand grown 2.4% over an eight-year period, with US annual power generation over the last 20 years averaging less than 0.5% growth," Goldman Sachs said.

So while most investors focus on buying companies with direct exposure to AI, like semiconductor companies Nvidia, AMD, and Super Micro Computers, it might pay to gain indirect exposure via the utility companies that are helping power the unprecedented growth in AI-related electricity demand, according to Goldman Sachs.

Read the original article on Business Insider

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