We recently compiled a list of the 15 Best Data Center Stocks To Buy According to Jefferies, Citi and Wall Street Analysts. In this article, we are going to take a look at where Uniti Group Inc. (NASDAQ:UNIT) stands against the other data center stocks.
The boom in the interest surrounding artificial intelligence has not only affected semiconductor stocks, even though they’re the biggest beneficiaries. While the chips that these companies make are indispensable for running AI workloads, they have to be housed somewhere, and this is where data centers come into play.
In fact, for the data center space, AI has only accelerated the growing demand this industry is seeing. Prior to AI GPUs and accelerators, enterprise computing chips made by the same companies that are now making AI chips were seeing hefty demand. This demand led to gaming GPU companies effectively being transformed into enterprise computing firms, with sectors such as the SaaS and cloud computing industries relying on these products. For some SaaS stocks, you should check out 10 Best SaaS Stocks To Buy Now.
This pre AI demand for data centers is visible in statistics too. Data from Jefferies shows that the demand growth for data centers has jumped by between 10% to 20% for the last 15 years, or before AI GPUs hit the market. As expected, AI has accelerated this demand, with the demand for data center space outpacing 30% in most markets for the past two years. This growth in real estate requirements also means that while the computing industry might be able to scale up by providing products like networking gear and cables, tertiary industries like energy generation will take some time to catch up.
If you’re a believer in AI, then the optimistic line of thought would suggest that these tertiary firms will only grow in the future as they scale up their operations to meet the growth in AI data centers. After all, data from Goldman shows that a query made to ChatGPT consumes ten times as much energy as a Google search query – understandable since ChatGPT is parsing through data and drawing insights to generate a response. By 2030, AI is expected to grow data center power demand by as much as 160%, as data centers potentially account for 4% of global energy consumption and Europe in particular needs more than $1 trillion to power its AI grid.
Naturally, since the US is responsible for ushering in AI, AI energy consumption in America is higher than that in other countries. According to the Boston Consulting Group, by 2030, AI power consumption will account for 16% of all of America’s energy use. It is expected to grow by 15% to 20% annually and touch as much as 130 GW, or the amount of electricity that’s used by 100 million homes. AI chip companies are also aware of these trends, with the latest AI chips promising to improve energy efficiency by 25x. Improving AI performance at the semiconductor level is important especially since some areas where data centers are growing are being forced to turn to coal power to reduce the power gap.
Nowhere is this clearer than in Northern Virginia, where data centers process 70% of the world’s internet traffic. With more than 300 data centers that churn out more than $700 million in taxes annually, the region’s computing centers are expected to require a whopping 11,000 megawatts of electricity annually by 2035 according to estimates by the local regulator. This demand has also spurred a $5.2 billion effort to lay down new transmission lines and keep coal power plants open for longer than initially planned.
Not only does AI need real estate and power, but it also needs water. Since energy can neither be created nor destroyed, all the megawatts of power that AI chips need have to go somewhere. For the chips, it is dissipated in the form of heat, and cooling this requires copious amounts of water. Estimates show that not only does training GPT-3 evaporate a whopping 700,000 liters of drinkable water, but global AI demand by 2027 could end up using anywhere between 4.2 billion to 6.6 billion cubic meters of water.
Coming back to real estate, it might be the easiest way for the AI savvy investor to cash in on the world’s thirst for computing. Citi believes that the “development and construction of hyper-scale data center capacity will grow meaningfully over the next 7 years,” as global industrial giants expand into the data center space. Not only are industrial firms actually converting their warehouses into data centers, but Citi adds that the associated power demand for these computing facilities will grow between the mid teens annually until 2030.
So, as these Wall Street firms lay out a maze of industries that will profit from AI, we decided to look at the top data center stocks to buy according to analysts.
Our Methodology
To make our list of the top data center stocks to buy, we ranked the US listed holdings of Global X’s data center ETF and the stocks chosen by Jefferies and Citi by the average analyst share price target percentage upside and picked out the stocks with the highest upside.
For these stocks, we also mentioned the number of hedge funds that had bought the shares in Q1 2024. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Aerial view of a communication site, showing the breadth of the company’s real estate portfolio.
Uniti Group Inc. (NASDAQ:UNIT)
Average Analyst Share Price Target Upside: 58%
Average Analyst Share Price Target: $5.80
Number of Hedge Fund Investors in Q1 2024: 19
Uniti Group Inc. (NASDAQ:UNIT) is a real estate investment trust headquartered in Arkansas. The firm builds and operates communications infrastructure, including fiber networks, which are key for high end data centers, particularly for AI related use cases. Since it’s a fiber connectivity company, Uniti Group Inc. (NASDAQ:UNIT) sits right at the heart of a little known but massive shift taking place in America right now. This is the shift from old copper wires, weighing as much as 800,000 tons to new fiber optic networks which provide Uniti Group Inc. (NASDAQ:UNIT) the ability to profit from new initiatives such as direct to home fiber passing through its properties. However, headwinds in the form of slow telecommunications and consumer spending in the case of an economic downturn persist especially since Uniti Group Inc. (NASDAQ:UNIT) operates primarily in the communications real estate market.
Uniti Group Inc. (NASDAQ:UNIT)’s management shared its thoughts on the shift to fiber during the Q2 2024 earnings call:
“Yes, so as you mentioned, and as Kenny mentioned earlier, this is a fully funded business plan to get us through the combined company plan and cashflow inflection to cashflow positive in 2026. And really, the pieces of that are really just executing on both companies’ plans as they have in place today. Continuing to, at Kinetic, continuing to drive fiber deeper into that business, replacing copper, and hitting those marks and hitting the penetration goals for the fiber product, fiber to the home product at Kinetic is going to be key. Doing that at a cost that’s as projected, and that’s been going really well, as Kenny mentioned, the cost per passing at Kinetic is coming in at $650 per home, which we think is an industry-leading number.
And so continuing to execute on that capital plan, bringing fiber to those homes, and then achieving the penetration rates that Kinetic is showing good progress toward achieving. And then at fiber infrastructure, it’s really continuing to execute on just what we’ve been talking about, lowering capital intensity, delivering more and more lease up higher return type deals. But investment levels in that fiber infrastructure business are relatively consistent with what they are today. And then also for that Windstream business, continuing to drive efficiencies, drive TDM costs out of that business, which is a big part of their plan over the next couple of years, and they’re making great progress with regard to doing that. We saw some nice efficiency gains in their costs this quarter, and the results that were just published today in our 8-K saw some good efficiency gains in that business, so continuing to drive that through.”
Overall UNIT ranks 6th on our list of the best data center stocks to buy. While we acknowledge the potential of UNIT as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UNIT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
