Much of the excitement over artificial intelligence (AI) has focused on the semiconductor companies that have profited from the huge increase in capital spending by the cloud computing giants. However, AI data centres need a lot more than just chips to function, and there are already a lot of lesser-known businesses benefiting from this investment.
Clearly materials, machinery and workers are required to construct these buildings. On top of this, they then need to be filled with wiring, servers and both water- and air-cooling systems. Then they must be hooked up to the grid and fed with power.
Historically, power demand for data centres has grown between 10 and 20 per cent annually, but the emergence of AI has accelerated this trend. The graphics processing units (GPUs) that are needed to train the models consume three to four times more power than the central processing units (CPUs) that run traditional data centres. As a result, power demands have accelerated to between 30 and 40 per cent annually in the areas where AI data centres are being built out.
Given this, analysts at Jefferies are forecasting that energy consumption growth in the US and Europe will rise from the current negligible levels to an annual rate of between 2 and 3 per cent.
But this will put even more pressure on energy grids at a time when supply is already limited. Meta (US:META) has guided to increase its capex by 36 per cent this year to $37bn (£29bn), but would have spent even more if it wasn’t for grid restrictions. Speaking on the Dwarkesh podcast in April, Meta chief executive Mark Zuckerberg said: “I think we would probably build out bigger clusters than we currently can, if we could get the energy to do it.”
All this means there will need to be a lot of investment in infrastructure such as battery storage, transmission lines and switches. Utilities such as Vistra (VST) and Constellation Energy (CEG) are among the best performing US shares this year, in the belief that they will find a way to meet this excess demand.
Components manufacturers are also in demand: correspondingly, Jefferies upgraded Schneider Electric (FR:SU) from hold to buy last month. The French multinational sells electrical components to data centres and utilities companies that need to build out the grid. Currently it makes 19 per cent of its revenue from data centres, and Jefferies is now modelling low teens growth for the business over the next three years.
In the US, Eaton (US:ETN) is similarly profiting from this growth. Eaton produces relevant electrical components including transformers, voltage regulators and equipment racks. Around 14 per cent of its revenue comes from data centres, but this is the fastest growing part of the business.
Management is now forecasting that the overall AI data centre market will grow at a compounded rate of 25 per cent in the medium term, up from previous guidance of 16 per cent just a few months ago. In the three months to March, Eaton’s organic revenue grew 8 per cent while its adjusted earnings per share rose 28 per cent. This rate isn’t about to slow anytime soon, given its order backlog is growing even faster, rising 31 per cent from the year before to record levels.
There are other winners, too. All this energy transmission creates heat. Fans need to cool servers as quickly as the electricity comes in, and as GPUs consume much more energy, they produce much more heat. Around 15 to 20 per cent of data centre costs will go towards heating, ventilation and air conditioning systems (HVAC).
Last quarter, HVAC manufacturer Johnson Controls (US:JCI) saw its North American backlog expand 19 per cent year on year, while its European orders were up 8 per cent. An issue is its exposure to China, where an economic slowdown meant its Asian revenue was down 26 per cent. Across the company as a whole this dragged growth down, leaving it flat for the year.
However, management is confident the “tight relationships” it has built with the leading cloud computing companies will keep expanding its pipeline. “We are starting to plan with them for data centres that are not going to break ground for the next 12 to 18 months,” chief financial officer Marc Vandiepenbeeck said in May.
Nvidia has been getting the bulk of the attention, but its GPUs can't operate in isolation. There are a host of other suppliers that are out of the headlines, making money.
