(Bloomberg) — Investors looking for a unique way to tap into the stock market’s artificial intelligence boom are finding an intriguing chance in what is traditionally the dullest corner of the stock universe: public services.
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AI is the buzzword these days, and everyone from chipmakers to computer equipment makers to automakers are trying to paint themselves in its hopeful colors. This is also behind the latest stock market rally, as investors saw last week.
On Thursday, shares of Meta Platforms Inc. saw their worst performance since October 2022 after the company announced it would spend much more than expected to develop AI. The market valuation of Google parent Alphabet Inc. surpassed $2 trillion on Friday, while Microsoft Corp. also rose after companies showed progress in AI in their quarterly results.
But here’s the problem with AI technology: It requires an enormous amount of energy to develop and operate. And that’s where utilities come in.
“Data center power demand was once huge, then came the AI hype and the need for power skyrocketed,” said Manju Naglapur, senior vice president and general manager of cloud solutions, applications and infrastructure at Unisys Corp. spent in data centers, energy consumption will increase massively.
The S&P 500’s utilities sector fell 10% in 2023, its worst year since 2008, making it the weakest group in the stock benchmark, which soared 24% in total. This wasn’t much of a shock given that companies tend to perform poorly during periods of persistently high interest rates.
Shares have recovered somewhat in 2024, rising 4.4%, as cost controls have offset higher refinancing spending and record capital spending. But the biggest shift in sentiment toward utilities is the hope for growing demand from the new, power-hungry data centers needed for AI’s expansion.
The biggest driver
“The AI narrative has the greatest investor interest,” said Ryan Levine, head of utilities coverage at Citigroup Inc. “It has the potential to be the biggest driver in the sector.”
Utilities in the United States are bracing for a historic surge in electricity demand, driven by data centers and AI. Even outside of Data Center Alley in Northern Virginia, where Dominion Energy Inc. has temporarily suspended new data center connections in 2022 due to grid constraints, companies are planning new power plants and transmission lines.
Artificial intelligence is poised to contribute to a 900% increase in energy demand for Chicago-area data centers, which will potentially require as much electricity as four nuclear power plants can produce, it recently said Calvin Butler, CEO of Exelon Corp. Southern Co. expects its electricity sales to reach 6% annual growth, with about 80% coming from data centers.
Read more: AI needs power so much that old coal plants remain
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