In the feverish race towards AI innovation and implementation, fortunes are already being made - especially for those providing the tools needed in this digital gold rush. As AI applications continue to grow in complexity, their computational needs surge in tandem, creating an attractive market for those able to fulfill this demand.
Let's dive into a promising investing area that is set to benefit from the AI euphoria, i.e., data center.
Nvidia & AMD: Powering AI's Ambitions
Nvidia, a renowned designer of semiconductors essential for many AI servers, is an obvious player in this space. On May 24, Nvidia comfortably surpassed analysts' revenue and profit expectations for the three months to April. Jensen Huang, Nvidia’s CEO, affirmed the world is on the cusp of a "new computing era."
The firm's share price leapt by 30% following the announcement, pushing the company’s market value tantalizingly close to $1trn. Nvidia's substantial revenue from data-center operations, accounting for 56% of sales, could feasibly double due to AI's increasing demand for more powerful chips.
Not to be left in Nvidia's shadow, AMD is also poised to take advantage of the surging demand for AI computing power. Despite being a smaller player in the GPU-design game, AMD's forthcoming new GPU could allow the firm to gain a slice of the expanding market.
Data Center REITs: Housing the AI Revolution Led by Nvidia and AMD
The data-center leasing companies like Equinix EQIX represent a different facet of the AI market - the physical housing of AI systems. As demand for cloud computing skyrockets, data-center landlords like Equinix find their properties in high demand. AI needs advanced GPUs and massive computational power for data training and inference, and data centers are key to fulfilling these needs.
Vacancy rates at data centers stood at a record low of 3% in the second half of 2022. Moreover, Equinix's new GPU "as a service" offering has further diversified its portfolio, positioning it as a potential rival to cloud computing behemoths such as Amazon, Alphabet, and Microsoft.
Using the adjusted funds from operations ratio (AFFO) - a common measure for a REIT's financial performance - Equinix shows remarkable strength. Wall Street estimates project AFFO per share growth of about 10% for the next couple of years. If these estimates hold, Equinix's share price should continue to perform well, making it a steady beneficiary of the AI transition.
The Windfall for Data Centers
Data center companies stand to gain significantly from the increasing AI expenditure across various sectors. The AI boom is set to trigger top-line growth for these companies and improve their profit margins. While Equinix is a great company in the space, investors have a pure-play ETF in this space – Global X Data Center REITs & Digital Infrastructure ETF VPN.
ETF in Focus
The underlying Solactive Data Center REITs & Digital Infrastructure Index seeks to provide exposure to companies that have business operations in the fields of data centers, cellular towers and digital infrastructure hardware.
Equinix takes about 13.1%, followed by American Tower (10.2%) and Crown Castle (9.6%). Real Estate takes about 57.5% while IT and Communications make up the next two spots at 29.8% and 12.7%.
The AI boom is reshaping industries and redefining opportunities. While data centers might not be the first sector that comes to mind when considering AI investments, their pivotal role in the AI ecosystem makes them an enticing option. Data center REITs like Equinix, with their promising growth prospects and financial stability, provide an attractive, though often overlooked, investment opportunity in the burgeoning AI landscape.
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