In this piece, we will take a look at the 15 best data center stocks to buy according to Jefferies, Citi and Wall Street Analysts.
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.
A futuristic datacenter with servers and high-tech equipment, signifying the company’s cutting-edge digital technology.
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).
15. Equinix, Inc. (NASDAQ:EQIX)
Average Analyst Share Price Target Upside: 18%
Average Analyst Share Price Target: $905.73
Number of Hedge Fund Investors in Q1 2024: 66
Equinix, Inc. (NASDAQ:EQIX) is a data center collocation and hosting company which means that it provides businesses with the real estate to host their servers. It is one of the few stocks on our list that’s on both Citi and Jefferies’ lists. Citi believes that the firm not only offers a “valuable hub” for cloud and generative AI products. Additionally, Equinix, Inc. (NASDAQ:EQIX) offers a “fully managed service for Nvidia AI.” Jefferies had set a $910.86 share price target for Equinix, Inc. (NASDAQ:EQIX) in late June 2024, which provides a hefty upside over the current share price of $778.79. One key advantage that Equinix, Inc. (NASDAQ:EQIX) enjoys over its rivals is that the firm has been in business since 1998. This provides it with a key advantage when it comes to customer relationships, which are key in today’s environment when spending might drop due to an economic downturn. This means that while Equinix, Inc. (NASDAQ:EQIX)’s revenue will slow in case businesses cut back spending, it will pick up again when the economic clouds improve.
Equinix, Inc. (NASDAQ:EQIX)’s management commented on its robust momentum and industry presence during the Q1 2024 earnings call where it shared:
“We had a great start to 2024 driven by our highest Q1 bookings performance on record, strong conversion rates, completely favorable pricing dynamics, and lower-than-expected churn, all resulting in our 85th key quarter of top-line revenue growth, the longest such streak of any S&P 500 company. We closed more than 3,800 deals across more than 3,100 customers for the quarter demonstrating both the scale and the consistency of our go-to-market machine. And we again saw accelerating hyperscale demand translate into robust xScale leasing in both EMEA and Asia. While we continue to operate in an environment of broader economic uncertainty, and see some level of corresponding customer caution, our forward-looking pipeline is strong, and we remain optimistic about the opportunity ahead.”
14. Freeport-McMoRan Inc. (NYSE:FCX)
Average Analyst Share Price Target Upside: 25%
Average Analyst Share Price Target: $50.62
Number of Hedge Fund Investors in Q1 2024: 86
Freeport-McMoRan Inc. (NYSE:FCX) is one of the more interesting Jefferies data center stock plays since it’s a mining company. It produced a whopping 1.1 billion pounds of copper in 2023, and the metal is why the investment firm believes that Freeport-McMoRan Inc. (NYSE:FCX) is a great data center play. Copper is the dominant metal when it comes to data centers and computers, and the shares have received a Buy rating from Jefferies. Freeport-McMoRan Inc. (NYSE:FCX) is quoted by several sources to be one of the biggest, if not the biggest copper producers in America. This lends it a significant competitive advantage since expanding production in the mining industry often comes with hefty capital expenditure, making it difficult for rivals to catch up in the short term. However, it also leaves the stock vulnerable to economic downturns, as the demand for the metal drops in a slow economy as evidenced by the sluggish demand in China. Conversely, any pickup in economic activity as indicated by lower interest rates tends to be beneficial for the shares.
Freeport-McMoRan Inc. (NYSE:FCX)’s management commented on its future outlook during the Q2 2024 earnings call where it shared:
“We’ve discussed on prior calls, the impact of macro sentiment and investor positioning that can drive large moves in pricing. Richard referred to the domestic economic challenges in China, the ongoing weakness in the Chinese property market, destocking and working capital management and increase in copper exchange inventories and delays in actions to stimulate economic growth, which have all weighed on the market. In the U.S., we’re seeing — continuing to see strong demand for copper from a broad range of sectors. And globally, we favorable demand drivers for the future associated with copper’s increasingly important role in the global economy. Copper is a foundational essential metal when it comes to electrification, and the world is becoming more and more focused on copper-intensive energy applications.
The facts are its physical characteristics and superior conductivity make it the metal of electrification. New massive investment in the power grid, renewable generation, technology infrastructure and transportation are driving increased demand for copper and forecast call for above-trend growth and demand for the foreseeable future. As we review the fundamentals and match the demand side up with supply, we look at the limitations of existing supply growth, the challenges and extended time frames required to build new supplies and projections for peak mine supply over the next couple of years. These factors, combined with secular demand trends point to tight market conditions as we go forward. With Freeport’s leading position in the industry, large-scale current operations and future growth pipeline, we’re very well positioned to benefit from this fundamental outlook in the future.”
