B (3:31)

Yeah, there's kind of two parts to that equation. They're the people who need the capacity in order to fund operations, to fund the queries and the training that we talked about. And there's also the people who are actually funding the projects themselves who are offering capital. You need both part of those equations to make that work. And so far we haven't seen cracks happening on either side of those equations. But that doesn't mean that there hasn't been public pushback just from the peoples who daily lives have been impacted from these expansions and honors that build out that is happening and continues to happen. As Dan mentions, it has massive implications for things like energy consumption. The IEA projects that global energy consumption for data centers alone will double by 2030. And in the United States, the Pew Research center projects that AI based electricity usage will rise 133% in that same time period. So I understand that a lot of investors hear that and they think the obvious takeaway is that there's going to be a need for infrastructure investment. Right. That's a great opportunity for energy investments over the next couple of years because you need energy to power those initiatives. What do you personally make of that?

A (4:37)

Yes, I mean there is definitely that side to it. But like you said, it's a multi layered story. The big story here isn't just that there is a big demand for more energy. It's also that the imbalance between supply and demand means that prices are rising and it's hard to keep up with the build outs as fast as you need to. So what a lot of hyperscalers are doing is they're taking control of their own destiny and building their own energy sources. Building or buying, I should say. For example, recently Microsoft has restarted or signed a deal to restart Three Mile island with the kind of traditional reactors that are already there, but they're going to get replaced over time with the smaller modular reactors. So nuclear power in Microsoft's hands. But they're not the only ones. Amazon is doing the same thing. They recently bought a nuclear powered campus with plans to install modular mini reactors. And Google isn't exactly doing that. Instead they're signing deals with independent companies like Nextera Energy, which is another supplier of modular nuclear reactors. It's nuclear is making a comeback a decade or so after Fukushima, but in a different form. And maybe this will go over okay with the people and regulators, I don't know. But it's one way to get your hands on cheaper energy. And in the long run it's still not cheap to build, but it will get affordable to run. So that's one way to get the power you need for your data centers.

B (6:26)

It reminds me of this quote, I never watched House of Cards, but I know this quote from the Netflix TV show which is what is it powers the new real estate? Something along that line. And I think the commentary is around physical power, like, you know, the influence you have over other people, not actual energy power, but in this context for the people who are investing and trying to make AI a reality, it is kind of the real estate that, that you need. And it is, I think, the bottleneck that investors are missing, which is the energy consumption that is necessary. And it's very much the real bottleneck that these hyperscalers are facing. You can have access to all the physical real estate in the world in Northern Virginia, wherever it may be, and you can have access to all the capital in the world. But if you don't have access to energy or if there are local regulations or local pushback that is preventing you from being able to access the energy that you need to re run your data centers, then, then you lack the power, you lack the influence to actually make your dreams, whatever they may be, your, your data centers a reality. So it does, it makes a lot of sense to me that we see companies like Nextera, Microsoft, Amazon, Google, all of these companies trying to gain access to the limited supplies of energy and power that we have that they need to now because what they're talking about in terms of the build out of data centers, they need that. And right now that is the bottleneck that exists.

A (7:52)

Right. And it's not exactly new. I know for years, companies like Microsoft and Google have been building data centers with paying close attention to where they get their energy from and signing deals with local water power resources in places like Canada and northern Sweden. For that matter, there's a Google data center up in Kirina somewhere that is powered by a local waterfall basically. So you know, it's not exactly new, but it's up to a new level.

B (8:23)

Yes, exactly. And that's why I'm so excited about this opportunity because so many people stop that that one level of degree where they think about data centers and they think about the companies physically building data centers and they don't get to the the next degrees of separation about the companies that are helping make data centers a reality. So up next we're going to be breaking down the investment opportunities for data centers but at different points on the value chain. So stick with us. We're going to be taking that one step further talking about some specific companies benefiting from the AI in our build out.

D (8:51)

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B (10:02)

We're discussing data centers and the businesses that not only benefit from them, but also help make them a reality. Luckily for investors, there are plenty of stocks that are playing critical roles in this value proposition. From operators, REITs and energy and the like. And our last segment we'll get to some picks and shovels plays but for now let's keep it to the direct beneficiaries. Anders, I want to start with you. If an investor wants public market exposure to the data center build outs, where are you sending them first?

A (10:27)

So one stock I'm really excited about in this space is hp. HP Enterprise, you know, one half of the old Hewlett Packard conglomerate that's been around for decades, but it's split up in two parts about 10 years ago. And HPE has become a giant in building high powered computer systems, which is perfect for the kind of data centers that AI hyperscalers need. When you look at the top 500 list of supercomputers these days, in the top 10, about six of them, I believe were built by HP in the last update in November. And these guys know how to build really high powered systems. That comes in handy at this point. So despite HPE's muscle in the data center space where they can provide anything from the actual supercomputers to now, with Juniper networks under its belt, the networks that put them together and the feed data from one part of the system to another and then out to the world, they build everything except the building, basically. And despite this strong position, the stock is trading like an absolute bargain. With a forward PE around 8 and a price turn to growth ratio about 0.5. Anything below 1 is supposed to be a bargain and this is a good bargain. Price to sales is under one too. It's like, you know, you're buying a Walmart stock here, but you're getting an AI powerhouse instead. So it's hard to beat that in my book. And I'm actually excited about boring old HPE at this point.

B (12:27)

It's so interesting to hear you mention hpe, because when I think about hpe, I think about the company that it probably was a decade ago or more than a decade ago, which was the consumer electronics laptop company. I think it was the brand that made my first laptop. But they've spun off their consumer business now and this is a business that is trying to reinvent itself. Making that acquisition of Juniper has given it exposure to the AI data center boom and build out. It's valued like a legacy business. And to an extent I could understand why. I think Wall street, myself included as part of that, have a maybe outdated view of this company. It's valued, maybe a bit like a value trap. But if they're able to get some of that expos and get that return to growth of the AI data center build out, you can also understand how this is a business that has a management team that is trying to turn things around and is forward thinking in a way that the market is just simply not giving them credit for. So I think it's incredible. We've been doing this podcast and talking about AI and data centers for so many years now and nobody, Anders has mentioned HP before. Hpe I should say before. So it's certainly one for us to dig into more. Dan, I want to pass it to you. What data center or even really data center adjacent opportunities do you think think are going underappreciated by the market today? Anders has set the bar high with hpe.

C (13:45)

I don't know if I'm going to get that high. But Emily, you and Anders were talking earlier about hyperscalers building out their own data center installations and that's been a big part of the demand. But there is a whole class of different companies, the real estate investment trusts that concentrate on data center being a third party data center provider and they're doing their own installations. Some of these companies are specially are specifically doing data centers. In particular, Digital Realty Trust Ticker DLR is the most obvious company in this space. They have really hammered down on the data center opportunity. But you've also seen some other real estate investment trusts jump in. Companies like equinix, which ticker EQ IX, Iron Mountain ticker IRM and even American tower ticker AMT. You might know these REITs, they've did different things in the past. For instance, American Tower really concentrated on building cell towers for 5G wireless networks. And so but the data center opportunity really has just been so strong that these companies haven't been able to resist the allure of diversifying their businesses. And so a lot of companies trying to really trying to get data centers on the ground, no matter, you know, in whatever way that they can.

B (15:04)

Well after me talking about how power is the new real estate, maybe real estate is the new real estate, maybe real estate isn't really getting disrupted. You still do need the physical assets there. So it's good to mention some of the REITs that are still benefiting from the data center build outs as well. But up next we're going to move on to what is, I think my favorite segment of today's show. We're going to be digging into the real picks and shovels of data centers, some of the under recognized businesses that help make them a reality. So stick with us.

A (15:30)

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B (16:00)

Welcome back to Motley Fool Money. As we wrap up today's show, we're going to discuss some even more under the radar businesses that are operating as the picks and shovels of AI data center build outs. These are the type of opportunities that are my personal favorites and I have to call out one or two here just for fun. For example, when I was running the Marijuana Masters Investing Service here at the fool, we were always looking for these types of ancillary opportunities that benefited from things like cannabis legalization without being overly index to it. And one such example was a company called Aon Inc. Their ticker symbol is AA O N. They were a custom or are a custom H VAC manufacturing company that was actually one of the first businesses to help make custom heating systems for cannabis greenhouses in North America. And ironically, Aon is actually also has exposure to the data center build out too because they made an acquisition of a company called Basics a couple years ago that helps manage thermal cooling for hyperscalers. I mean these are the types of companies that you would never otherwise hear about that still mass massively benefit from the expansion of data centers that when everyone else is focused on the hyperscalers of the world, these are the kind of quiet beneficiaries. So Dan, I already mentioned Aon. Are there any ancillary or picks and shovels plays for data centers that are on your radar?

C (17:15)

Yeah, there's a ton of companies out there that have traditionally been in low growth areas that have turn out to have specific expertise that's vital for data center construction and operation. And it's really, it's really helped them take off and generate a whole new growth story. Sterling infrastructure, for instance, Ticker Strl, it's traditionally done more civil engineering work. If you've driven on a highway or you've driven over a bridge, odds are good they may have had something to do with that. But Sterling has also moved into providing, you know, concrete pads and design work on data center installations. They've also done work on some of the systems that go into them and just the project management to get these data centers completed. Sterling has turned into a real business. Yeah, it's funny you mentioned Aon. There's a couple of other companies that I'm looking at that are kind of in the mechanical, electrical and cooling area comfort systems. Ticker Fix has particular expertise in H Vac applications. Data center refrigeration has become a new focus. And Then EMCore ticker EME kind of similar exposure to electrical, plumbing. A lot of just the innards of these data centers you don't think of, you generally think of just rows of computers but there's a whole bunch of other duct work and work that goes into making these data centers a reality. It's these companies that are benefiting from it the most. They've kind of hit some investors radars already but I think there's still a lot more room for them to continue to grow in the years ahead.

B (18:52)

So I know Comfort Systems and Core for the listeners who are members of Stock Advisor are probably pretty familiar because those are two recommendations. On the hidden gem side, the scorecard. Since this is the Tuesday rule breaker focused hour, I have to balance the score here. Dan, I'd have to talk about another company actually fits really well that's on the rule breaker side of the scorecard company called Stantec. And as you were talking about Sterling infrastructure reminded me a little bit about Stantec. The ticker is S that's on the rule breaker side of the scorecard. They're a Canadian design focused engineering consultant company and they also have it's single digit exposure in terms of top line but exposure to the data center build out as well, helping design projects as well as some energy projects and infrastructure, that sort of thing for data center build out in North America. So there's just so many unique ways to play it. I love those stocks. Anders, what about you? Anything you're watching that's benefiting from data center buildouts but not say overexposed to it.

A (19:47)

Right. So Dan was talking about the plumbing that goes into data science and mine is one of those. You have power generation, you have AI systems, you need to connect them together so they can actually run on that power. And one of the specialists in that is Schneider Electric. May sound like a German company or something, but it's actually French and trading on the over the counter market instead of NYSE or nasdaq, which leaves it out of the, you know, media circuit and a lot of people won't recognize it. But if you walk into your local Lowe's or Home Depot or any other hardware store and wander into the electrician's department, you will find that a good chunk of the electric gear there is made by Schneider Electric under the name Square D. It's like about one third of the brake panels and the electric switches you'll find in the local hardware store. But it's not just for residential construction. They also make power panels, switches, everything you need to get electricity from point A to point B in a data center. And data center sales are a major contributor to their growth in recent years. So Square D, by the way, was an all American company that schneider bought in 1991, I believe, to get a foothold in the American market. And they're still a major player today thanks to that acquisition. Sometimes these deals work out, but most people won't know it as Schneider Electric, so they wouldn't know how to invest in it. And there you go. It's a fairly modestly valued stock, a little bit cheaper than arch rival Eaton. And, you know, it's one of those things to have to look for and you just won't stumble over it. You have to go looking for it.

B (22:04)

Absolutely incredible. I mean, after today's podcast, I think our listeners have plenty of really unique ways to play the data center build out without being overexposed or over indexed to any single center, any single trend. Some really great businesses that are very diversified across all parts of the value proposition. Proposition for data centers here. So Don and Anders, thank you both so much for joining. As always, people in the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes For Dan Kaplinger, Anders Beiland, and the entire Motley fool money team, I'm Emily Flippin. We'll see you tomorrow.