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In recent weeks, markets have been gripped by political turmoil in France. As French shares slipped on President’s Macron decision to call snap elections, the entirety of the French market (the largest equity market in Europe) was surpassed by a single powerhouse: Nvidia. This tech titan has skyrocketed to become the world’s most valuable company, and with a market cap of more than $3trn, it is also larger than the French GDP.
Nvidia’s astonishing rise (it is up more than 20 times since January 2020) has been nothing short of spectacular. All of a sudden AI is everywhere, so much so that Collins, the dictionary publisher, named “AI” the most notable word (it is strictly an initialism) of 2023. It was chosen because it “has accelerated at such a fast pace and become the dominant conversation of 2023”.
If AI was the dominant conversation of 2023, it looks well set to be a major investment theme of 2024 and beyond. Investors are busy trying to work out how to profit from the rise. Nvidia is the obvious play. But with it dominating benchmarks and now bigger than entire national equity markets, it is probably already a sizeable position in most passive portfolios. Surely there is scope for an active manager to find other less crowded (and cheaper) ways of playing this game-changing trend?
When looking for investment opportunities in value chains, the best place to start is the bottle-neck. In the case of data and AI, all roads (or cables!) lead through data centers.
The backbone of AI growth
Data centres are the lifeblood of today’s economy, housing the computing power that processes and protects the vast amounts of data businesses generate daily. But with the rise of generative AI, this industry is on the brink of major disruption. Not only will the demand for new data centres skyrocket, but their design and location will also undergo significant changes. Bloomberg Intelligence forecasts the generative AI market will explode to $1.3trn over the next decade, up from just $40bn in 2022. Data centre operators and developers aiming to seize this opportunity must understand that AI-specialized data centres will differ greatly from conventional facilities. The future is AI, and the infrastructure must evolve to meet it.
“During a gold rush, sell shovels”
With the rapid influx of money fueling the AI revolution, several critical value chains are powering the construction of AI data centres. The rush to keep up with AI advancements is driving significant investments into these essential components, creating a booming ecosystem of opportunity.
Powering the AI revolution
The energy requirements of AI will be massive, albeit hard to measure with any level of precision. According to Goldman Sachs, a ChatGPT query needs nearly 10 times as much electricity to process as a Google search. If you ask ChatGPT itself, the answer could be 300 to 3000 times. The reason being:
“ChatGPT models, especially larger versions, involve intricate neural networks with billions of parameters. Processing a single query requires significant computational power.”
No matter the exact estimates, one thing is certain: AI is set to consume a staggering amount of energy in the coming years. According to the IEA, data centers, cryptocurrencies, and AI together used about 460 TWh of electricity globally in 2022, accounting for almost 2% of total global electricity demand. By 2026, this could soar to between 620 and 1050 TWh. This means an additional 160 to 590 TWh of electricity demand compared to 2022 - equivalent to adding the energy consumption of at least one Sweden or at most one Germany. The future of AI is powerful, but it’s also power-hungry.
Delving inside a data centre
Global spending on the construction of data centres is forecast to reach $49bn by 2030. Understanding the inner workings of a data centre is key to identifying the value chains fuelling the data explosion and the companies poised to profit. By breaking down the components and infrastructure that power these digital fortresses, we can pinpoint which industries and players are set to ride the wave of data centre growth.
Berenberg Capital Goods & Industrial Engineering paper June 2024
Data centres are divided into two main areas: “grey space” and “white space.”
White space is where the revenue-generating action happens. It holds servers and storage - the equipment that drives performance. This consists of two types of semiconductor chip:
CPUs (Central Processing Units) excel at general-purpose computing, handling a small number of tasks efficiently. They manage computations, execute instructions, and control data flow between components.
GPUs (Graphics Processing Units) are designed for parallel processing, performing numerous calculations simultaneously. Originally developed for rendering graphics, GPUs have become essential for AI, machine learning, and high-performance computing due to their superior parallel processing capabilities.
As the landscape of white space is shifting, GPUs are increasingly replacing CPUs and this is where Nvidia is winning so big.
Grey space is the backstage area, housing the power supplies, cooling systems, and backup generators that keep everything running smoothly and connected to the grid.
Data centres, packed with thousands of servers, rely on efficient cooling to keep everything running smoothly. In fact, the capacity of a data centre hinges on how effectively it can cool these servers - the better the cooling, the more servers you can stack in the same space, boosting productivity per square foot. Efficient cooling isn't just a technical necessity; it's a key driver of profitability. With cooling accounting for around 40% of a data centres energy consumption, mastering this aspect is critical for cost management and operational efficiency.
Building the data super highway
Among the key components of a data centre, the cabling system is critical in connecting servers, switches, and other crucial networking equipment. Without a robust and efficient cabling system, a data centre's smooth operation would be compromised, dragging down performance and productivity. A well-designed cabling setup ensures data flows seamlessly between devices, cutting latency and boosting performance.
Data centres use various cables to meet different transmission needs, with copper and fiber optic cables being the most common. But as businesses increasingly rely on cloud computing, data storage, and ultra-fast network performance, traditional copper cables just can’t keep up. Fiber optics are the future-proof solution for data centre networks. As businesses aim for uninterrupted operations and flawless data flow, fiber optics are taking centre stage in data centre infrastructure. Companies specialising in high quality cables are ideally positioned to build the super highway to carry the tremendous amount of data being created by AI.
Looking beyond Nvidia
AI is here and it's transforming our lives at lightning speed. Nvidia is leading the charge with computational power, but the critical infrastructure needs to catch up, and fast. This creates a golden opportunity for certain companies perfectly positioned in the supply chain to profit from the AI boom. It's an AI gold rush, and we're on the hunt for the best ‘picks and shovels’ in the market.
Risk warnings: Please note that past performance is not a reliable indicator of future results. Capital is at risk. Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice.
Important notice: This content is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
