AI and Climate Change: Cooling Technologies Heat Up for Investors
The rapid expansion of artificial intelligence (AI) has generated a wave of investment opportunities, with the focus not solely on direct AI contributors like chipmakers but also on supportive peripheral industries. Among these, the refrigeration and air conditioning sectors are emerging as key beneficiaries, driven by the role of cooling systems in AI development and the broader implications of climate change and demographic shifts in the United States.
Noteworthy is the remarkable ascent of Nvidia Corp., which has seen its value surge by approximately 140% this year, buoyed by the AI investment frenzy. This trend underscores the increasing importance of data centers, necessitated by AI’s growth, which in turn propels the demand for electrical power, alongside heating and cooling solutions. Despite rising bond yields, the S&P 500 utilities index has seen a significant uptick, recording a 17.5% increase from the end of February to May 21.
Exploring this theme further, analysts, including Andrew Obin of BofA Securities, identify the intersection of AI, decarbonization, and population migration to warmer U.S. states (such as South Carolina, Florida, and Texas) as fertile ground for investment. Specifically, the spotlight falls on refrigeration and air conditioning sectors, poised for a compound annual growth rate of 16% through at least 2026, driven by these converging trends.
The challenge of cooling data centers, in particular, reveals the critical importance of this sector. AI chips, known for generating considerable heat, require cooling solutions beyond traditional air-based methods. This is evident in the assessment that an additional megawatt of electricity for IT infrastructure necessitates cooling equivalent to that of a 115,000 square foot commercial building. This immense cooling requirement highlights the pivotal role of innovative cooling technologies in supporting AI’s growth.
Among the companies positioned to capitalize on these developments are Vertiv Holdings LLC and Eaton Corp. Vertiv, with 75% of its sales stemming from data center-related products and services, embraces the forefront of this market. Its acquisition of CoolTera Ltd. and partnership with Nvidia in the U.S. Department of Energy’s COOLERCHIPS research program underscore its commitment to leading-edge cooling solutions. Meanwhile, Eaton Corp., despite its more diversified portfolio, with 14% of revenue from data centers, remains a significant player in this expanding field.
These developments have not escaped the notice of investors. Vertiv has seen its stock price soar by 230.7% over the past 12 months, with Eaton experiencing a 58.7% increase. While trading at earnings multiples of 30.3 and 34.8 respectively, these companies may still present reasonable investment opportunities if their growth trajectories persist.
The Broader Market Landscape
Beyond these specific companies, the market’s shifting dynamics spotlight a broader rotation into value and small-cap stocks, particularly within the U.S. This pivot, supported by rate cut expectations and the quest for value beyond the lofty valuations of large-cap stocks, suggests a robust environment for discerning investors. As Invesco’s chief global market strategist, Kristina Hooper, notes, this trend towards small-cap and value investments marks a significant shift in market leadership, potentially signaling sustainable new directions for investment strategies.
Furthermore, political factors, including expectations surrounding future elections, influence market movements, illustrating the complex interplay between politics, corporate profitability concerns, and long-term fiscal health considerations.
In conclusion, as AI continues to drive technological advancement and climate change propels the need for sustainable solutions, sectors like cooling technologies emerge as critical components of the future landscape. For investors, staying attuned to these trends means not only recognizing the potential of direct AI contributors but also understanding the expansive ecosystem that supports and is transformed by artificial intelligence’s evolution.
