Appeals of Energy Stocks Amid the Demand from Data Centers

AI has easily been one of the most salient themes in the US capital markets in recent years, driving massive gains in the S&P 500.

While investments in AI will continue to be strong this year, many investors are beginning to question the sustainability of the rise of tech stocks that are implementing AI.

But investing in tech companies isn’t the only way to gain exposure to the explosive AI boom!

Today’s newsletter will focus on another overlooked area of the stock market, which also has exposure to the massive growth of AI data centers this year.

Data Centers Driving Energy Demand

Artificial intelligence has massively disrupted labor markets and the economy, helping companies usher in a new wave of productivity and cost-cutting measures. While sideline observers may have been more skeptical in 2023-2025, it is now clear that AI is here to stay.

Major tech companies that have been able to implement new AI initiatives have driven the lion’s share of the S&P 500 gains, and have a promising outlook ahead of them.

However, AI giants have already delivered massive returns and may have limited potential to deliver similar returns in the future. Nvidia Corporation has already soared over 25,000% in the past decade, making it one of the most valuable companies in the world.

One underloved and overlooked area to examine includes energy stocks, many of which will be direct beneficiaries of the data center demand boom in the coming years. Major tech companies have already recognized the role these energy players will play in this transition, and have made investments in this area and secured long-term contracts with companies.

The demand for data centers is poised for massive growth in the coming years, and entities like the Department of Energy have noted that this is going to result in a strong demand for energy in the United States.

Data Center Demand Growing

As companies ramp up AI investment in the coming years, the demand for global data centers will continue to increase. IT power demand has already doubled from the 2020 levels, the year when AI began to make its initial imprint on the world.

Major institutions have been calling for rapid growth in these centers in the coming years, creating a massive vacuum for energy companies to fuel these centers.

Goldman Sachs recently projected that data center demand will grow by 50% by 2027. According to SP Global, the demand for these centers will triple from 2025 levels by 2030.

The Artificial Intelligence industry has a massive potential for growth in the coming years. In a recent report, Fortune Business Insights projects that this industry will grow at a CAGR of 26.6% through 2034.

IBM recently posted a study showing how executives view AI as a tool to increase efficiency, and most importantly, to drive innovation.

One of the key developments, which is being overshadowed by the hype around AI companies, is that these developments are going to create a massive demand for energy. Many energy stocks are currently hidden in plain sight as solid investment opportunities positioned to capture this growth.

The DOE projects that data centers will consume 12% of the total electricity in the United States, up from only 4% in 2023. This demand is approaching at a time when traditional US banks have been cutting financing to US energy companies.

Existing energy giants that have endured previous bear markets are now well-positioned to benefit from an upcoming surge in energy demand.

The current setup has created a fat pitch for select energy stocks that are positioned to help fuel the growth of data centers in the United States. 

Company and Government Positioning

The growth of data centers in the upcoming years couldn’t be clearer, and major tech companies have been doing everything they can to position themselves ahead of this

Tech giants like Google, Amazon, and Microsoft have been investing in energy sources like nuclear to help secure the inevitable energy demand from their AI investments.

Another important step that tech companies have been taking is to secure long-term energy agreements with energy producers. Amazon and Meta have been locking into long-term contracts with both nuclear and natural gas companies to help secure their energy demands in the upcoming years.

This confidence signal for major US tech companies indicates how energy companies have a crucial role to play in this transition. The DOE has also announced agreements with 24 companies to help boost AI and drive innovation in sectors like energy.

Considering Energy Stocks Amid the AI Boom

AI stocks have already delivered massive bull runs in the past couple of years, which has currently left valuations unattractive. Large-cap giants will likely be limited in terms of their potential performance, while some smaller AI gems may spring up in the market.

However, one of the clear-cut ways to gain exposure to the boom in AI and data centres includes investing in some of the unloved energy sectors, which will help power this technological boom in the coming decade.

One intriguing area to examine is nuclear energy, which will play a key role in helping to power data centers. A recent report from Deloitte noted that nuclear energy will help support around 10% of this demand.

The Global X Uranium ETF (URA) is one vehicle to consider, as this fund invests in a basket of leading uranium players in the United States, Canada, and other countries.

Another strong area to consider is renewable energy companies, which currently power around 24% of the energy required to run data centers. The iShares Global Clean Energy ETF (ICLN) is one vehicle to consider to gain exposure to some of the world’s leading renewable energy companies.

Nuclear and renewable energy stocks are two of several ways to gain exposure to the massive growth of data centers in the upcoming years.