Lucy Raitano
LONDON (Reuters) – European investors are turning to more established sectors such as utilities, professional data providers and even miners to take advantage of the next wave of the AI boom, a year after AI chip maker Nvidia (NASDAQ:) emerged as a driving force force.
Enthusiasm for artificial intelligence has fueled stock markets higher in 2023, bringing Nvidia and Dutch semiconductor equipment supplier ASML (AS:) into the spotlight.
Nvidia shares are hovering near record highs ahead of quarterly earnings due late Wednesday. However, some of the shine has faded from Europe’s artificial intelligence mega-capitalists, prompting investors to look for cheaper alternatives.
Stock pickers are now eyeing companies and sectors that could become long-term beneficiaries of AI.
“The first phase of AI was obviously with chipmakers like Nvidia. Then you’ve already seen the second wave move into industrial companies that are actually supplying components to data centers,” said Bernie Akong, CIO of Global Multi-Strategy Alpha at UBS O.’Connor.
“And now we’re just starting to roll out phase three to utilities/energy companies in the last few weeks.”
LAUNCHING DATA CENTERS
The data centers needed to advance generative artificial intelligence require enormous amounts of energy, and this is expected to grow as demand for the centers grows.
The International Energy Agency estimates that by 2026, total electricity consumption in data centers will exceed 1,000 terawatt-hours (TWh)—about the same as what Japan consumes now—from 460 TWh in 2022.
“One of the most interesting ways in Europe to use AI on a multi-year basis is through some of these utility companies,” UBS’s Akong O’Connor said.
Demand for data center space in Europe will also outpace supply of new inventory for the third year in a row, with demand for AI exacerbating the problem, said Kevin Restivo, who heads European data center research at real estate services provider CBRE.
The utilities index has risen more than 9% over the past five weeks, driven largely by expectations of lower interest rates, compared with a 4.7% rise in the main index. But they still underperform the rest of the market year-to-date, up just 0.2% compared with the benchmark index’s 9% rise.
A recent Bank of America note said European utility executives are talking about artificial intelligence, but the growth potential from data centers is “anecdotal at best.”
Despite this, the bank argues that a host of companies stand to benefit from the boom in AI-driven electricity demand, from Fortum, Verbund and renewable energy provider EDP to larger players such as RWE, Iberdrola (OTC:), Enel (BEAT:) and Angie.
ADOPTED VS PROMOTED
A year ago, investors were concerned about AI’s disruptive potential in everything from IT services to media, education and consulting.
“The way I look at AI in the UK is that the US has the opportunity and we have the followers,” Trevor Green, head of UK equities. Aviva (LON:) Investors said.
“Investors will become particularly interested when we can actually quantify the potential return. Suppliers are rightly still a bit cagey on this issue as we are at such an early stage of adoption,” he said.
He cited the London Stock Exchange, data analytics group RELX and software group Sage as examples of companies that have been working on artificial intelligence for years.
“Now we’re starting to see revenue opportunities from this,” he said.
Marcel Stoetzel, joint portfolio manager of the Fidelity European Fund and Fidelity European Trust, says much of the hype around artificial intelligence has centered around the big US names behind the technology.
Last year, shares of companies such as Microsoft (NASDAQ:) and Alphabet (NASDAQ:), which support OpenAI, Google, grew by 33%-41%.
Meanwhile, some European companies are quietly using AI to develop new products that are already benefiting their customers, Stoetzel said.
“This has resulted in European-listed beneficiaries trading at more attractive prices,” he said, naming German software company SAP and Swiss drugmaker Roche among those his team is targeting to develop the theme artificial intelligence.
Mining companies are another area of investor interest, particularly with copper, which hit a record high above $11,000 a metric ton this week, largely driven by a shortage of material for quick delivery.
Commodity trader Trafigura believes demand for copper from data centers and artificial intelligence could rise to one million tonnes by 2030 and worsen supply shortages by the end of the decade.
“The copper boom is also part of the artificial intelligence craze,” said Kathleen Brooks, director of research at trading platform XTB.