We recently analyzed top 8 utilities stocks that are popular among hedge funds because of their AI-related growth catalysts. Since Southern Co (NYSE:SO) was part of the list of these stocks, and being one of the biggest utilities providers in the US, it deserves a deeper look.
The AI revolution that started with the launch of ChatGPT has catapulted several sectors into the limelight that were hitherto believed to be unrelated to AI. Utilities is one of the most notable of these sectors. As more and more companies deploy AI in their systems and develop new applications, they need high-performance data centers to power their AI processing chips. And these data centers are power hogs. Why? Goldman Sachs in a recent report titled AI, data centers and the coming US power demand surge said that a single ChatGPT query takes about 6 to 10 times as much electricity to process as a typical Google search. Goldman Sachs also expects AI-led data center boom to cause a 160% increase in power demand in the U.S. Goldman analysts estimate that utility companies will invest $50 billion to support this new demand from the data center sector.
Goldman Sachs also expects data center power usage to more than double by 2030. It estimates that data centers would account for about 8% of the total power demand in the US, compared to just 3% in 2022. Goldman also expects power demand from AI to rise about 200 TWh in 2024-30, with the bull case estimate clocking in at 330 TWh, and the bear case estimate sitting at 110 TWh.
A latest Bloomberg report cited Manju Naglapur, senior vice president and general manager for cloud, applications and infrastructure solutions at Unisys Corp, who said that data centers were causing a spike in power demand even before the latest AI boom. Naglapur thinks with the current scale of investments in data centers, power consumption will increase “massively.”
As investors begin to look beyond obvious AI mega-cap tech names like Nvidia, Meta Platforms and Alphabet, which have already racked up solid gains so far, utilities stocks are trending in the AI investing space. Utilities Select Sector SPDR Fund (NYSEARCA:XLU) is up about 11% so far this year. Kevin Gordon, a Director and Senior Investment Strategist at Charles Schwab, recently said that 50% of the utilities sector constituents have seen their new 52-week highs. Utilities stocks come with an added allure thanks to their stable businesses and high dividend yields, something investors are looking for in the current economic environment where interest rates are expected to stay elevated.
For this article we scanned Insider Monkey’s database of 919 hedge funds updated for the first quarter of 2024 and listed down all utilities stocks that are actively exposed to the AI power demand surge. From these stocks we chose 8 stocks with the highest number of hedge fund investors. 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).
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Southern Co (NYSE:SO)
Number of Hedge Fund Investors: 29
Southern Co’s (NYSE:SO) electric utility arm in Georgia, Georgia Power expects retail electricity sales to jump 9% through 2028 with 80% of the demand coming from data centers. Southern Co’s (NYSE:SO) management talked about data center growth (which came in at 12% in Q1) and expectations during Q1 earnings call:
“All our businesses experienced a strong start for 2024, driving our results meaningfully higher than our estimate of $0.90 per share.
While there were several factors for this performance versus our estimate, one worth highlighting is the higher than expected weather-adjusted electricity sales in our commercial customer class. This was driven by a combination of our strong local economies as well as increased usage by many of our existing data center customers. Sales to data centers were up over 12% for the quarter compared to last year. Overall, weather-normal retail electric sales to all classes were 1.7% higher than the first quarter of 2023. Industrial sales are beginning to show signs of recovery following a soft 2023, with year-to-date increases led by the lumber and paper industries.”
Read the entire earnings call transcript here.
As of the end of the first quarter of 2024, 54 hedge funds tracked by Insider Monkey reported owning stakes in Southern Co (NYSE:SO). The biggest stakeholder of Southern Co (NYSE:SO) during this period was D. E. Shaw with a $132 million stake.
Southern Co (NYSE:SO) ranks 6th in Insider Monkey’s list of the 8 Best Utilities Stocks to Ride the AI Boom in 2024.
If you are looking for an AI stock that is as promising as Microsoft 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.