Weekly Wisdom – May 16, 2024

By Hightower Great Lakes on May 16, 2024

The Race for Advancement

Artificial intelligence (AI), artificial general intelligence (AGI) and generative artificial intelligence (GenAI) are just a few different buzz terms you may hear regarding the future of technology. Following the release of ChatGPT in late 2022, AI chatter has taken over financial markets and remains one of the most discussed topics.

The first quarter earnings season has been all about AI and how companies are positioning themselves for growth in the space through greater investment, research and product offerings.

Across Big Tech, Alphabet (GOOGL), Amazon (AMZN), Meta (META) and Microsoft (MSFT) combined have boosted capex over 35% y/y through the first quarter, with Big Tech likely invested over $200 billion in AI infrastructure this year.[1]

Importantly, AI investments have been starting to pay off for Big Tech. Specifically, Amazon, Alphabet and Microsoft, who all saw their cloud businesses grow 17%, 31% and 28%, respectively, in Q1.

Microsoft CEO Satya Nadella mentioned in the company’s earnings call that more than 65% of Fortune 500 companies were using its cloud services. AI investments are beginning to be realized for Big Tech, which will further ramp up investments.

Chart 1: Big Tech Is Betting Big on AI, Specifically Cloud and Generative AI[2]

Big Tech’s share of capex has also been rising in recent years. These four companies are expected to account for 25% of total capex spend in the S&P 500 by 2025, up from 10% in 2019.[3]

The vast sets of data these companies maintain through search engines and social media cites set them up to train data models to better understand their customers and trends.

In the most recent quarter, AMZN spent $15 billion on capex, GOOGL spent $12 billion, META spent $6.5 billion and MSFT spent $11 billion. Furthermore, MSFT and GOOGL increased their capex spending 65% y/y and 91% y/y, respectively, in the quarter.

For the year, FactSet projects capex to be $45 billion for MSFT (+60% y/y), $37 billion for META (+36% y/y), $47 billion for GOOGL (+48% y/y) and $62 billion for AMZN (+18% y/y).

On AMZN’s earnings call, management stated that they expect capex to ‘meaningfully’ increase y/y in 2024 to support growth in AWS and generative AI. Also, GOOGL management stated that they have seen significant y/y growth in capex, reflecting their confidence in the opportunities offered by AI across their businesses.

It is not just technology companies that will be ramping up capex in the race for AI. Advancements in data center construction, energy output and utility infrastructure will be needed to keep pace with technological investment.

Companies such as Eaton (ETN), Quanta Services (PWR) and Black Hills (BKH) are focused on power and utility infrastructure needed to build an AI future, and all three have seen increased investments and project strong fundamentals in the coming years through continued demand.

A Main Bottleneck for AI: Increasing Energy Output

AI is not cheap, and greater computing power means higher costs. ChatGPT queries are 6-10x more power intensive than Google searches, and OpenAI spends nearly 12 cents per 1,000 words ChatGPT generates due to computing costs.[4] Energy output will need to be greatly enhanced to support the level of usage needed for AI technology.

Goldman Sachs Investment Research expects U.S. power demand to experience growth “not seen in over a generation.” It expects a 2.4% CAGR in U.S. power demand growth through 2030, compared to 0% over the last decade.

Moreover, 47 gigawatts of incremental power generation capacity will be needed to support U.S. data center growth, along with increased outputs of gas and renewable sources. This will likely result in $50 billion of capital investment in U.S. power capacity through 2030, according to the research group.

Chart 2: The Increased Need for U.S. Power To Support AI and Data Centers[5]

Data Center Demand to Grow

Eaton’s management gave great insights into data center demand on its Q1 earnings call. The team believes the data center market will grow at a 25% CAGR between 2022 and 2025, and they have been caught off guard at the level of demand they have seen. Companies are racing to build out the infrastructure needed to support AI advancements and machine learning capabilities.

Hyperscale data centers have been the fastest growing and will likely continue to be going forward. Hyperscale data centers are larger and more efficient than typical data centers. A typical data center may be 100,000 square feet, where hyperscale centers are 1 to 2 million square feet.

It is estimated that there are 9,000-11,000 data centers worldwide, with the IEA projecting data center electricity consumption in 2026 to double that of 2022.[6] Overall, it is expected that data center construction spending will reach nearly $50 billion by 2030.[7]

Chart 3: Data Center Construction Spending to Hit $50 Billion by 2030[8]

Utilities to Likely Gain From AI Usage

The utility sector has experienced 33.4% y/y earnings growth in Q1, the second highest growing sector, with independent power and renewable electricity producers growing earnings 142% y/y.[9]

Utility companies will be supplying power to the data centers and will realize growth through greater AI usage. Data centers are expected to be 8% of total U.S. power demand by 2030, relative to 3% in 2022. By 2030, data center power use is expected to more than double today’s use.

Chart 4: Data Center Power Use to Be 1.8-3.4x 2023 Levels by 2030[10]

Overall, capital expenditures are likely to continue to rise as the world economy enters a new stage of technological advancement. Many sectors will be affected by this adoption and stand to benefit from increased efficiencies.

Big Tech – and energy, industrials and utilities – are set up for the most gain through adoption. We believe this trend will continue throughout this decade and greater spending towards AI will follow.

Click here to read last week’s Market Note (5/9).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Forbes. As of May 9, 2024.

[2] Source: Goldman Sachs Investment Research. As of April 2024.

[3] Source: Capital Group. As of May 8, 2024.

[4] Source: NYT. As of May 10, 2024.

[5] Source: Goldman Sachs Investment Research. As of April 28, 2024.

[6] Source: Yale Environment 360. As of February 6, 2024.

[7] Source: McKinsey & Company. As of January 17, 2023.

[8] Source: McKinsey & Company. As of January 17, 2023.

[9] Source: FactSet. As of May 10, 2024.

[10] Source: Goldman Sachs Investment Research. As of April 28, 2024.