Over the past few years, the rapid adoption of cloud computing has driven mega-cap technology companies such as Amazon, Microsoft and Alphabet to ramp up capital expenditure (capex) on building out data centres. More recently, artificial intelligence (AI) has accelerated these spending plans as cloud providers scramble to construct next generation data centres capable of handling the immense computational demands of training these models.
Investors have been watching these capex plans closely, but questions have been raised as to whether increased spending can truly drive growth, opening up new paths to revenue and profitability. It’s a fair question, especially as investors are well acquainted with discussions around a tech sector bubble. In our view, companies leveraged to this wave of capex remain well positioned and present numerous opportunities for discerning stock pickers.
For example, Advanced Micro Devices has developed a graphics processing unit to compete with NVIDIA, Taiwan Semiconductor Manufacturing Company controls most of the market share for producing these cutting-edge chips, and semiconductor companies rely on Synopsys software to accelerate chip design and improve efficiency.
However, this wave of AI-driven capex is not just transforming the technology landscape; it is also fuelling a broader investment cycle across other sectors.
One of the most prominent is electrification. Data centres are becoming a significant driver of electrical demand, accelerating the shift towards renewable energy and grid modernisation. Government initiatives, such as the Infrastructure Act and Inflation Reduction Act in the US, are further propelling this trend, as the world looks to meet the growing energy needs of AI while transitioning to sustainable power sources.
Companies like Eaton, an electrical infrastructure company with a meaningful portion of its business dedicated to data centres, and Quanta Services, a key enabler of transmission and distribution line construction, are well positioned to capitalise on the increasing demand for electricity.
Proprietary data providers represent another major beneficiary of this technological shift.
Data is the lifeblood of all these large language models which underpin the AI revolution. Companies that own and manage vast datasets stand to benefit significantly from the increased reliance on data-driven technologies.
London Stock Exchange Group (LSEG), for instance, has transformed from being a traditional stock exchange to a data powerhouse. Most of its revenue now comes from monetising its extensive databases, which are increasingly valuable as AI continues to enhance productivity across industries.
AI is also reshaping business models across all sorts of sectors.
Companies that can harness digital technologies to improve productivity for their customers are the ones which are most likely to improve their value proposition and pricing power. Shopify is a prime example. Its business model offers e-commerce software and service solutions that empower brands and merchants to establish and expand their online presence.
The company’s strength is catering to small and medium-sized businesses, which often lack the resources to compete online. Its ability to provide these merchants with world-class technology and expertise at an affordable price has been a key driver of its success. Importantly, Shopify’s economics align with those of its customers. It earns a small percentage of its merchants' underlying sales, meaning it does better if its customers do better.
Shopify offers a wide range of services, including its online storefront, payment processing, and advertising services, and is developing a strategy to leverage AI to improve each of its services. For example, the company has already introduced a few products, such as image and text generation tools, that allow merchants to easily create compelling product pictures and descriptions. Shopify does not charge much above its payments processing function, but we believe it is adding a lot more value and should be able to charge more in the future.
Market euphoria around themes like AI can sometimes get the better of investors. We saw this expectation gap in action recently when investors wiped more than $200bn off Nvidia’s market value following what was supposedly a positive set of results.
Who is to say whether the rapid growth and high valuations we have seen in the AI sector are sustainable, or when the bubble might burst. For us, it’s about identifying the companies exposed to this exciting trend while staying disciplined on valuation as companies approach our intrinsic value estimates. At the same time, it is important to recognise that further fundamental acceleration remains possible moving forward.
From chipmakers and data centres to electrical infrastructure and e-commerce platforms, it’s these sorts of companies which are poised for sustained growth. As AI’s influence inevitably expands, those investors who can identify these foundational sectors will remain at the forefront of the next technological revolution.
Jason White is a portfolio manager at Artisan Partners. The views expressed above should not be taken as investment advice.