Motley Fool Hidden Gems Investing - For Data Centers, Power is the New Real Estate (Literally)

Starting point is 00:00:00 Emily Flippen The opportunity in data centers is increasingly looking like an opportunity in power and real estate. We're digging in today on Motley Fool Money. Today is Tuesday, January 13th. Welcome to Motley Fool Money. I'm your host, Emily Flippen, and today I'm joined by full analysts Anders Beiland and Dan Kaplinger as we dig into data centers and the different ways investors can play on their build-out without baking in too much risk. We'll walk through all the different players that are helping make data centers a reality, how sustainable the build-out really is, and how mega investors are helping fund them at scale. But to start, we have to talk about why we're discussing data centers today.

Starting point is 00:00:49 Of course, everyone knows large tech companies have been building data centers at breakneck speeds to help facilitate the AI ambitions that we all know and some of us love. I mean, artificial intelligence requires massive amounts of data center capacity to not only handle the queries that are being sent by you and I and enterprises to LLMs, but also to help iterate and constantly train those same models. But this is a topic that's really hitting close to home recently for individual Americans alongside investors. I know myself, I live here in Maryland. I'm just a stone's throw away from Northern Virginia. It's sort of ground zero for data center build in the United States. CBRE has recently released

Starting point is 00:01:27 reports noting that data center vacancies are at all-time lows in the second half of 2025. Many big customers are pre-leasing out capacity into 2027 and beyond. So for the people living nearby, this means higher electricity costs and data centers obviously require massive amounts of power to run. So that's some of the backdrop. Dan, I want to start with the capacity. I think investors' minds often immediately turn to the fear that the data centers that we see so far have actually been overbuilt. That's given the narrative that we talk about a lot around fears around an AI bubble. But the information that we have that I just indicated, I mean, that only shows that demand has continued to outstrip supply. How does that build out look

Starting point is 00:02:09 to you today? Yeah. So it's funny, Emily, because yes, I've heard those stories about how we're overbuilding data centers left and right. But the fact is that most of those data centers that we've heard about, they haven't even been built yet. Investors, I think, are reacting more to news of the planned deployment of future data centers than about data centers that are currently on the ground right now. Building completions, I mean, they're going up pretty fast, but it's not an overnight thing. There's a lot of infrastructure. There's a lot of supporting work that has to go into getting a data center up and running. It's going to take years to get all the ones that are planned actually built. Now, yes, there is some risk of a reversal if hyperscalers take their

Starting point is 00:03:00 plans and get cold feet about, okay, yeah, are we going to get the return on investment that we had hope that we were going to get. Yeah, sure, that might make people pull back on their plans to complete some of the ones that are scheduled to get done in out years. But I think we're a long way from that point. And right now, the existing data centers that are up and running and operational are not enough to take care of the current demand that AI and other intensive computing applications are requiring. Yeah, there's kind of two parts to that equation. They're the people who need the capacity in order to fund operations, to fund the queries and the training that we talked about. And there's also the people who are actually funding the projects themselves,

Starting point is 00:03:42 who are offering capital. You need both part of those equations to make that work. And so far, we haven't seen cracks happening on either side of those equations, but that doesn't mean that there hasn't been public pushback just from the peoples who do daily lives have been impacted from these expansions. And Anders, that build-out that is happening and continues to happen, as Dan mentions, it has massive implications for things like energy consumption. The IEA projects that global energy consumption for data centers alone will double by 2030. And in the United States, the Pew Research Center projects that AI-based electricity usage will rise 133% in that same time period. So I understand that a lot of investors hear that, and they think the obvious

Starting point is 00:04:25 takeaway is that there's going to be a need for infrastructure investment, right? That's a great opportunity for energy investments over the next couple of years because you need energy to power those initiatives. What do you personally make of that? Yes, I mean, there is definitely that side to it. But like you said, it's a multi-layered story. The big story here isn't just that there is a big demand for more energy. It's also that the imbalance between supply and demand means that prices are rising and it's hard to keep up with the buildouts as fast as you need to so what a lot of hyperscouts are doing is they're taking control of their own destiny and building their own energy sources building or buying i should say for example recently microsoft has restarted or

Starting point is 00:05:15 signed a deal to restart three mile island with the the kind of traditional reactors that are already there but they're gonna get replaced over time with the smaller modular reactors so nuclear power in microsoft's hands but they're not the only ones amazon is doing the same thing they recently bought a nuclear powered campus with plans to install modular mini reactors and google isn't exactly doing that instead they're signing deals with the independent companies like next era energy which is another supplier of modular nuclear reactors it's uh nuclear is making a comeback you know a decade or so after fukushima but in a different form and maybe this will go over okay with the the people and regulators i don't know but it's a

Starting point is 00:06:10 one way to get your hands on cheaper energy and in the long run it's still not cheap to build but it will get um affordable to run so that's one way to get the power you need for your data centers it reminds me of this quote i never watched house of cards but i know this quote from the the netflix tv show um which is what is it powers the new real estate something along that line. And I think the commentaries around physical power, like the influence you have over other people, not actual energy power. But in this context, for the people who are investing and trying to make AI a reality, it is kind of the real estate that you need. And it is, I think, the bottleneck that investors are missing, which is the energy consumption that

Starting point is 00:06:57 is necessary. And it's very much the real bottleneck that these hyperscalers are facing. You can have access to all the physical real estate in the world in Northern Virginia or wherever it may be, and you can have access to all the capital in the world. But if you don't have access to energy or if there are local regulations or local pushback that is preventing you from being able to access the energy that you need to run your data centers, then you lack the power. You lack the influence to actually make your dreams, whatever they may be, your data centers a reality.

Starting point is 00:07:29 So it makes a lot of sense to me that we see companies like NextEra, Microsoft, Amazon, Google, all of these companies trying to gain access to the limited supplies of energy and power that they need to now. Because what they're talking about in terms of the build-out of data centers, they need that. And right now, that is the bottleneck that exists. Right. And it's not exactly new. I know for years, companies like Microsoft and Google have been building data centers with paying close attention to where they get their energy from and signing deals with local water power resources in places like Canada and northern Sweden, for that matter. There's a Google data center up in Kiruna somewhere that is powered by a local waterfall, basically. So, you know, it's not exactly new, but it's up to a new level. Yes, exactly. And that's why I'm so excited about this opportunity because so many people stop at

Starting point is 00:08:28 that one level of degree where they think about data centers and they think about the companies physically building data centers and they don't get to the next degrees of separation about the companies that are helping make data centers a reality. So up next, we're going to be breaking down the investment opportunities for data centers, but at different points on the value chain. So stick with us. We're going to be taking that one step further, talking about some specific companies benefiting from the AI data center build out. to your coffee routine with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune

Starting point is 00:09:03 function and Coffee Plus B6 to keep your day moving. Or go with the flow and choose Ginseng Delight, our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Welcome back to Motley Fool Money. We're discussing data centers and the businesses that not only benefit from them, but also help make them a reality. Luckily for investors, there are plenty of stocks that are playing critical roles in this value proposition from operators, REITs, energy, and the like. In our last segment, we'll get to some picks and shovels plays, but for now, let's keep it to the direct beneficiaries. Anders, I want to start

Starting point is 00:09:42 with you. If an investor wants public market exposure to the data center build-out, where you sending them first so one stock i'm really excited about in this space is hp hp enterprise uh you know one half of the old hewlett packard uh conglomerate that's been around for decades but it split up in two parts um about 10 years ago and the hpe has become a giant in building high-powered computer systems, which is perfect for the kind of data centers that AI hyperscalers need. When you look at the top 500 list of supercomputers these days,

Starting point is 00:10:27 in the top 10, about six of them, I believe, were built by HP in the last update in November. And these guys know how to build really high-powered systems. that comes in handy at this point so despite the hpe's muscle in the data center space where they can provide anything from the actual supercomputers to now with juniper networks the the networks that put them together and the feed data from one part of the system to another and then out to the world they build everything except the building basically and despite this a strong position the stock is trading like a an absolute bar absolute bargain with a forward p

Starting point is 00:11:16 around eight and a price turn to growth ratio about 0.5 anything below one is supposed to be a bargain and this is a good bargain price to sales is under one too it's like you know you're buying a walmart uh stock here but you're getting an ai powerhouse instead so it's hard to beat that in my book and i'm actually excited about boring old hpe at this point it's so interesting to hear you mention hpe because when i think about hpe i think about the company that it probably was a decade ago more than a decade ago which was the consumer electronics laptop company i think it was the brand that made my first laptop, but they've spun off their consumer business now. And this is a business that is trying to reinvent itself. Making that acquisition of Juniper has given it

Starting point is 00:12:10 exposure to the AI data center boom and build out. It's valued like a legacy business. And to an extent, I can understand why. I think Wall Street, myself included as part of that, have a maybe outdated view of this company. It's valued maybe a bit like a value trap, but if they're able to get some of that exposure and get that return to growth of the AI data center build out, you can also understand how this is a business that has a management team that is trying to turn things around and is forward thinking in a way that the market is just simply not giving them credit for. So I think it's incredible. We've been doing this podcast and talking about AI and data centers for so many years now, and nobody anders has mentioned HPE before. So it's certainly

Starting point is 00:12:53 one for us to dig into more. Dan, I want to pass it to you. What data center or even really data center adjacent opportunities do you think are going underappreciated by the market today? Anders has set the bar high with HPE. I don't know if I'm going to get that high, but Emily, you and Anders were talking earlier about hyperscalers building out their own data center installations. That's been a big part of the demand, but there is a whole class of different companies, the real estate investment trusts that concentrate on data center being a third-party data center provider, and they're doing their own installations. Some of these companies are specifically doing data centers, in particular, Digital Realty Trust, ticker

Starting point is 00:13:37 DLR, is the most obvious company in this space. They have really hammered down on the data center opportunity. But you've also seen some other real estate investment trusts jump in, Companies like Equinix, which is ticker EQIX, Iron Mountain, ticker IRM, and even American Tower, ticker AMT. You might know these REITs. They've did different things in the past. For instance, American Tower really concentrated on building cell towers for 5G wireless networks. But the data center opportunity really has just been so strong that these companies haven't been able to resist the allure of diversifying their businesses. A lot of companies are really trying to get data centers on the ground in whatever way they can. After me talking about how power

Starting point is 00:14:27 is the new real estate, maybe real estate is the new real estate. Maybe real estate is really getting disrupted. You still do need the physical assets there. It's good to mention some of the REITs that are still benefiting from the data center build-outs as well. Up next, we're going to move on to what is, I think, my favorite segment of today's show. We're going to be digging into the real picks and shovels of data centers, some of the under-recognized businesses that help make them a reality. So stick with us. New from Nespresso, blend wellness into your coffee routine with the Coffee Plus range, infused with functional benefits. Choose the coffee you love with added B vitamins, like Coffee Plus B12 to help support immune function and Coffee Plus

Starting point is 00:15:05 be six to keep your day moving. Or go with the flow and choose Ginseng Delight, our new double espresso with ginseng extract. Whatever lies ahead, don't change your morning. Let your morning change you. Discover Coffee Plus on Nespresso.com. Welcome back to Motley Fool Money. As we wrap up today's show, we're going to discuss some even more under the radar businesses that are operating as the picks and shovels of AI data center build outs. These are the type of opportunities that are my personal favorites. And I have to call out one or two here just for fun. For example, when I was running the Marijuana Masters investing service here at The Fool, we were always looking for these types of ancillary opportunities that benefited from things like cannabis legalization

Starting point is 00:15:47 without being overly indexed to it. And one such example was a company called Aon Inc. Their ticker symbol is A-A-O-N. They were a custom HVAC manufacturing company that was actually one of the first businesses to help make custom heating systems for cannabis greenhouses in North America. And ironically, Aon is actually also has exposure to the data center build out too, because they made an acquisition of a company called Basics a couple of years ago that helps manage thermal cooling for hyperscalers. I mean, these are the types of companies that you would never otherwise hear about that still massively benefit from the expansion of data centers that when everyone else is focused on the hyperscalers of the world, these are the kind of quiet

Starting point is 00:16:27 beneficiaries. So, Dan, I already mentioned Aon. Are there any ancillary or picks and shovels plays for data centers that are on your radar? Yeah, there's a ton of companies out there that have traditionally been in low-growth areas that turn out to have specific expertise that's vital for data center construction and operation. And it's really helped them take off and generate a whole new growth story. Sterling Infrastructure, for instance, ticker STRL, It's traditionally done more civil engineering work. If you've driven on a highway or you've driven over a bridge, odds are good they may have had something to do with that. But Sterling has also moved into providing concrete pads and design work on data center

Starting point is 00:17:14 installations. They've also done work on some of the systems that go into them. Just the project management to get these data centers completed, Sterling has turned into a real business. It's funny you mentioned Aon. There's a couple of other companies that I'm looking at that are in the mechanical, electrical, and cooling area. Comfort Systems, ticker FIX, has particular expertise in HVAC applications. Data Center Refrigeration has become a new focus. And then Emcor, ticker E-M-E, kind of similar exposure to electrical plumbing. A lot of just the innards of these data centers you don't think of. You generally think of just rows of computers, but there's a whole bunch of other duct work and work that goes into making these data centers a

Starting point is 00:18:01 reality. It's these companies that are benefiting from it the most. It kind of hit some investors' radars already, but I think there's still a lot more room for them to continue to grow in the years ahead. So I know Comfort Systems and MCOR for the listeners who are members of Stock Advisor are probably pretty familiar because those are two recommendations on the hidden gem side of the scorecard. Since this is the Tuesday Rule Breaker Focus Hour, I have to balance the score here, Dan. I have to talk about another company actually that fits really well that's on the Rule Breaker side of the scorecard, a company called Stantec. And as you were talking about Sterling Infrastructure, it reminded me a little bit about Stantec. The ticker is STN. That's on

Starting point is 00:18:40 the rule breaker side of the scorecard. They're a Canadian design focused engineering consultant company. And they also have, it's single digit exposure in terms of top line, but exposure to the data center build out as well, helping design projects as well as some energy projects and infrastructure, that sort of thing for data center build out in North America. So there's just so many unique ways to play it. I love those stocks. Anders, what about you? Anything you're watching that's benefiting from data center build outs, but not say overexposed to it? Right, so Dan was talking about the plumbing that goes into data centers, and mine is one of those. You have power generation, you have AI systems, you need to connect them together so they can actually run on that power.

Starting point is 00:19:23 And one of the specialists in that is Schneider Electric. It may sound like a German company or something, but it's actually French, and trading on the over-the-counter market instead of NYSE or NASDAQ, which leaves it out of the media circuit, and a lot of people won't recognize it. But if you walk into your local Lowe's or Home Depot or any other hardware store and wander into the electrician's department, you will find that a good chunk of the electric gear there is made by Schneider Electric under the name Square D. It's like about one third of the brake panels and the electric switches you'll find in the local hardware store. But it's not just for residential construction. They also make power panels, switches, everything you need to get electricity from point A to point B in a data center.

Starting point is 00:20:30 And data center sales are a major contributor to their growth in recent years. So Square D, by the way, was an all-American company that Schneider bought in 1991. I believe, to get a foothold in the American market. And they're still a major player today thanks to that acquisition. Sometimes these deals work out.

Starting point is 00:20:58 But most people won't know it as Schneider Electric, so they wouldn't know how to invest in it. And there you go. It's a fairly modestly valued stock. A little bit cheaper than arch-rival Eaton.

Starting point is 00:21:14 And, you know, It's one of those things you have to look for. You just won't stumble over it. You have to go looking for it. Absolutely incredible. I mean, after today's podcast, I think our listeners have plenty of really unique ways to play at the data center build out

Starting point is 00:21:31 without being overexposed or over indexed to any single center, any single trend. Some really great businesses that are very diversified across all parts of the value proposition for data centers here. So Don and Anders, thank you both so much for joining. As always, people in the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against,

Starting point is 00:21:53 so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Dan Kaplinger, Anders Beiland, and the entire Motley Fool Money team, I'm Emily Flippen. We'll see you tomorrow. Thanks for watching!

Motley Fool Hidden Gems Investing - For Data Centers, Power is the New Real Estate (Literally)

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