The bulls envision a world where AI is used to augment productivity to transform pretty much every industry. Yet at least so far, there’s been little attention paid to the immense volumes of energy and communications bandwidth to support ubiquitous AI chatbots needed to make that dream a reality. Consider the case of MDU Resources (MDU), writes Roger Conrad, editor of Conrad’s Utility Investor.
The S&P 500 is still a little more than 10 percent below its January 2022 high water mark. But thanks to a buying wave washing over a handful of now very expensive big technology stocks, the index and related ETFs are up 12.8 percent so far in 2023.
The catalyst: An outbreak of interest in stocks perceived as benefitting from adoption of artificial intelligence. But it’s worth thinking about the likely impacts of the rise of AI on essential services companies.
Consider data center operators. These companies are already CAPEX-heavy. Global leader Equinix (EQIX), for example, spent $2.7 billion over the last 12 months to keep its global fleet of centers competitive. That’s 35.6 percent of total revenue and 87.3 percent of cash from operations.
Given that burden, it’s fair to ask how quickly Equinix could completely overhaul its systems. Trailing 12-months free cash flow of $391 million, for example is more than consumed by $1.17 billion in annual dividend payments.
Rather than risk ruin in an environment of rising interest rates, the company will likely phase in whatever investment it makes in tandem with its customers’ demand. And the same will surely be true of other large data center owners including American Tower Corp (AMT), which is only now starting to see some earnings traction with its CoreSite unit.
The upshot is AI adoption holds both promise and peril for data center owners. But it’s outright bullish for electric utilities.
For one thing, data center owners are also already huge users of electricity. MDU this month won approval from the North Dakota Public Service Commission to provide electricity for Applied Digital’s (APLD) data center in the state.
That was necessary because the new load will be 180 megawatts of capacity. And the generating capacity needed is equivalent to roughly 28 percent of what the utility has currently.
For MDU, that’s a massive investment with a guaranteed return. And with North Dakota pushing for more data centers, there’s likely a lot more where that came from. That’s good reason to expect the company to beat its long-term earnings growth guidance as a standalone utility of 5 to 7 percent, especially if its data center customers go all in on generative AI.
Recommended Action: Buy MDU.
