Since our last blog spotlighting the ‘picks and shovels’ opportunities in the AI and data centre boom, the markets—and particularly AI stocks—have hit a rough patch. Nvidia, the darling of AI, has slid from its recent highs, and Europe’s AI semiconductor giant, ASML, has taken a similar hit. What went wrong? Theories abound—growth fears, weak U.S. jobs data, the Japanese Yen carry trade, and geopolitical jitters. Yet, the exact trigger for this month's sharp correction remains unclear. It’s likely a combination of all these factors, mixed with high valuations, crowded trades, and the thin liquidity of summer markets.

Investor anxiety is growing as market concentration intensifies, with money piling into a small number of large-cap stocks. In a piece we wrote earlier this month, we noted that 13 of Europe’s 15 largest funds held positions in ASML, with an average weighting of 6.2%. While ASML is undoubtedly a top-tier company, there are smaller players in the AI value chain benefiting from the data explosion and well worth a closer look.

In this note, we’re diving into data centre cooling and turning the spotlight on Munters, a lesser-known Swedish company that could be a hidden gem in the rapidly growing data centre cooling landscape.

Data centre gold rush

In last month’s blog, we highlighted the exciting opportunities data centres present as the backbone of the AI revolution. It’s not just the semiconductor giants raking in the profits—equipment suppliers, HVAC (Heating, Ventilation and Air Conditioning) companies, and power providers are also set to cash in.

Despite some market jitters, the AI boom is far from cooling off. If the tech titans are to be believed, we’re only at the beginning. Sundar Pichai, CEO of Alphabet (Google’s parent company), made it very clear during a recent earnings call: “The risk of under-investing is dramatically greater than the risk of over-investing.” Alphabet’s capital spending is set to skyrocket by 50% this year, reaching a staggering $48 billion, with much of that pouring into AI-driven infrastructure—primarily data centres.

And it’s not just Alphabet. With estimates suggesting that Alphabet, Microsoft, Amazon, and Meta will collectively spend $104 billion on AI data centres this year alone, the scale of investment is enormous. Include the contributions from smaller tech firms and other industries, and the total spending spree on AI data centres from 2024 to 2027 could soar to an astonishing $1.4 trillion. The AI arms race is in full swing, and the stakes have never been higher.

Keeping AI cool

Data centres are packed with thousands of servers that need to stay cool to keep things running smoothly. In fact, a data centre’s capacity—and its profitability—depends on how effectively it cools those servers. The better the cooling, the more tightly servers can be stacked, maximizing productivity per square foot. However, cooling typically eats up around 40% of a data centre’s energy bill. And if things overheat? The cost could be massive downtime.

Over the past decade, cooling technology has made huge leaps, with most large data centres upgrading from outdated air-conditioning systems to cutting-edge solutions. But as global temperatures rise and computing power skyrockets, even the best cooling tech is facing new challenges. If data centres are struggling to stay cool now, how will they handle the next generation of AI-driven computer chips predicted to generate 5 to 10 times more heat?

This challenge is underscored by the rapid rise in data centres' rack density—a measure of the data and energy capacity of servers. The average rack density is expected to jump from 8.5 kW per rack in 2023 to 12 kW per rack in 2024. And in high-performance setups, power densities can soar to 20 to 30 kilowatts per rack (equivalent to powering three cars with some even more extreme densities emerging (+70kW). The cooling challenge is only getting hotter, and data centres must keep up to avoid getting burned.

Spotlight on Munters

Munters, a Swedish mid-cap industrial powerhouse, is making waves as a global leader in energy-efficient climate solutions. Partnering with customers in critical sectors like pharmaceuticals, agriculture, and battery production, Munters excels where humidity, temperature, and energy efficiency are paramount. But the real opportunity right now is data centres.

Munters is at the forefront of providing advanced cooling systems that are essential for keeping data centres running smoothly and efficiently. Their Data Centre Technologies division is booming, with orders skyrocketing and profitability reaching all-time highs. Management is optimistic, forecasting a 10% growth rate for the data centre cooling industry.

With tech giants and hyperscalers planning massive investments, Munters is perfectly positioned to ride this wave of demand. The data centre cooling boom is just getting started, and Munters is set to be a key player in this long-lasting surge.

Stock profiles

Munters is a global leader in climate solutions for mission-critical processes. It offers innovative, efficient and sustainable solutions for customers in industries where controlling indoor humidity, temperature and energy efficiency is mission-critical.

This article was written by Pras Jeyanandhan, Manager of the VT Downing European Unconstrained Income Fund.

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