Time: 2024-05-23
Data center services are experiencing a surge in demand amid the AI revolution.
One of the primary investment areas within artificial intelligence (AI) is data centers. The rise of generative AI applications is driving a fresh wave of need for cloud storage, server racks, network infrastructure, and more.
While Nvidia is a key player in data center services, new contenders are entering the scene with robust solutions. Even tech giants like Amazon are pouring substantial investments into constructing their data centers. Investors who are astute recognize the myriad of opportunities entering the expanding data center domain, which is projected to reach nearly $440 billion by 2028 according to Statista.
Renowned stock analyst and media figure Jim Cramer recently highlighted Constellation Energy (CEG -1.11%) as a top choice for data center services. Despite appearing somewhat unconventional, Constellation Energy is engaged in discussions regarding intriguing partnerships and could emerge as a significant beneficiary of the AI data center surge.
Data centers consume a significant amount of energy
Data centers function as storage hubs for IT infrastructure and network architecture. These facilities house large server racks equipped with hardware like graphics processing units (GPUs) for accelerated computing.
Although data centers play a crucial role in the AI ecosystem, there is a major drawback: they consume substantial amounts of electricity.
According to the Department of Energy, data centers utilize anywhere from 10 to 50 times more energy than a standard commercial office, accounting for approximately 2% of total electricity consumption in the U.S.
Research from Goldman Sachs indicates that data center power demand will grow at a 15% compound annual growth rate (CAGR) through 2030, reaching around 8% of total power demand in the U.S. by 2030.
Constellation Energy presents a unique solution
Given that the secular trends driving AI are closely tied to escalating energy consumption, particularly electricity, data centers require an alternative solution sooner rather than later. Constellation Energy may have the solution.
The company operates across various segments of the energy sector, including solar, wind, and natural gas. One of the solutions that Constellation Energy offers is nuclear power, which has attracted interest from major tech companies.
During a recent earnings call, Constellation Energy's management hinted at discussions with tech giants Microsoft and Alphabet, the 'Magnificent Seven,' about potential collaborations on nuclear-powered data centers.
Additionally, Goldman Sachs acknowledged growing interest in nuclear power, deeming it 'an attractive generation source for data centers' due to its carbon neutrality and reliability.
Is Constellation Energy stock worth buying?
At the time of writing, Constellation Energy had a price-to-earnings (P/E) ratio of 28.4, exceeding the S&P 500's P/E of 24.8.
Moreover, when benchmarked against other regulated utilities, Constellation Energy seems to trade at a premium compared to some competitors.
Although it may appear pricier than other utilities, Constellation Energy presents an underrated opportunity in the realm of AI investments. While prominent tech companies and peripheral IT infrastructure competitors are obvious choices for investments, the energy sector should not be overlooked in the context of AI.
Therefore, Constellation Energy could be viewed as a more attractive option compared to many technology stocks, which have witnessed significant valuation expansion over the past year due to AI tailwinds driving buying activity.
Given the growing interest in nuclear power among major AI firms, the energy sector, and Constellation Energy, in particular, present appealing prospects for long-term investors.
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