With Nvidia overtaking Microsoft earlier this week, becoming the world’s most valuable company, Jamie Mills O’Brien, Investment Director at abrdn shares his outlook and analysis as follows:
“One of the most surprising stories of this year is the way in which Artificial Intelligence (AI) has developed. It is increasingly no longer simply the preserve of Nvidia or Microsoft – it is broadening by sector, geography and company. We think this remains one of the most powerful and important themes over the next decade.
While Nvidia may be the story of the day, we believe there are strong opportunities for investors looking ahead to those secondary and tertiary beneficiaries of the AI boom.
In our view, the next generation of companies to benefit will be concreted in three sectors: the energy and power infrastructure underpinning AI; opportunities around data centres; the combination of Generative AI with digital twin technologies.
Power infrastructure
Electricity consumption is expected to increase 40% in western countries, driven by AI data center consumption and green policies. Emerson CEO Lal Karsanbhai commented on a recent earnings call that a search on ChatGPT consumes six to ten times the power of a traditional search on Google. Estimates of the capital expenditure required to build out AI infrastructure continue to be scaled upwards. The increase in demand is real and is happening today.
At the same time, economies are rushing to decarbonise their electricity grids. The firms that are best placed to capitalise on this transformation are electrical companies such as Schneider and WEG, and utility focused equipment players such a Hubbell. Innovation is also needed in the way in which grids operate and perhaps AI itself can play its part in the design of a more efficient grid system. Companies such as Itron who offer smart meters and analytics software to the grid, or the likes of Alfen in Europe who sell smart-grid infrastructure and software are potential opportunities.
Opportunities around data centres
Another area of structural growth comes from the winners within datacentres themselves. Cooling and resilient power supply are necessary for the efficient and reliable functioning of datacentres.
The need for resilient power supplies and the slow-moving nature of grid upgrades leads to potential opportunity for companies offering back-up power generation and uninterruptable power supply equipment. Beneficiaries could include Schneider, Siemens, ABB, Munters and Eaton.
On the cooling side as well we see companies across the globe starting to scale. We think Asia and Emerging Markets will home many of the future leaders across these technologies. Among them are AVC and Aurus – while small today, the liquid cooling business is a material component of revenue growth. In Developed Markets, Vertiv has the most direct exposure to the datacentre theme with c.75% of revenues exposed to liquid cooling.
Digital twins
The combination of digital twins and generative AI is a powerful one. Digital twins are an accurate digital representation of a physical real-life asset, person or process that can be used to simulate outcomes and optimise behaviours. The backbone to a good digital twin is accurate, abundant, real-time data. In the past such large real-time data points have proven difficult to manage, however when combined with generative AI, large language models (LLMs) can summarise the essential information needed and enable efficient data transfer and processing of digital twins.
This presents an exciting growth runway for those companies providing digital twin technologies such as Dassault, Altair, Siemens, Aveva (owned by Schneider), Nemetschek, and Autodesk.
Finally, after a long period of high correlations, and markets driven by a small number of stocks, we think that this concentration is dispersing, with technology leaders of the future likely to come from down the market cap spectrum and in markets other than the US.”
