Powering the Future: Navigating the Data Center Dilemma

The rapid growth of artificial intelligence has fueled an unprecedented surge in data center demand, creating both opportunities and challenges for the industry. As AI capabilities expand exponentially, the energy-intensive nature of these technologies has raised concerns about sustainability and the ability to sustain future growth. This article explores the dynamics shaping the data center landscape and identifies two promising investment options that aim to address the industry's pressing issues.

Unlocking the Potential of Data Centers in the AI Era

The Rise of Hyperscalers and the Insatiable Appetite for Power

The data center industry has experienced a meteoric rise, driven by the proliferation of artificial intelligence and the growing dominance of hyperscale cloud service providers. According to the National Telecommunications and Information Administration, the number of data centers in the U.S. is projected to increase by 9% annually through 2030, with much of the growth coming from these hyperscalers. The four largest platforms – Amazon's AWS, Alphabet's Google Cloud, Meta Platforms, and Microsoft's Azure – collectively represent 78% of the total capacity.While AI has been the primary catalyst for this growth, the industry faces a significant challenge: the cost of AI technology is rising even faster than its capabilities. An Epoch AI researcher revealed that the cost of the largest AI training runs is growing by a factor of two to three per year since 2016, and by 2027, the cost to train the largest models could reach $1 billion or more.

The Energy Conundrum: Unsustainable Consumption and the Need for Innovative Solutions

Alongside the escalating costs, the energy demands of AI and data centers are staggering. A single ChatGPT search query uses 10 times more power than a similar Google search, and generating an AI image consumes the equivalent of half of a smartphone's total charge. The International Energy Agency estimates that the growth of AI will cause data centers' total electricity consumption to hit over 1,000 terawatt-hours (TWh) in 2026, roughly equivalent to the electricity consumption of Japan.This unsustainable course has prompted investors to seek out data center stocks that can address the industry's pressing challenges. The two companies highlighted in this article are poised to lead the charge in providing innovative solutions to the data center dilemma.

Digital Realty Trust: Leveraging Geographical Diversity and Colocation Advantages

Digital Realty Trust (NYSE: DLR) is a real estate investment trust (REIT) that specializes in data centers and is one of the world's largest REITs in the sector. With over 300 properties and more than 5,000 customers, Digital Realty Trust is well-positioned to capitalize on the growing demand for data center services.The company's broad geographical footprint and colocation model, which offers space, power, security, and network connectivity, make it an attractive investment. As AI-driven demand surges, Digital Realty Trust has been able to quickly backfill any vacancies, using the influx of cash to improve its financial situation, including paying down nearly $1 billion in debt during the previous quarter.Digital Realty Trust's colocation model aligns with the fastest-growing segment of the data center market, providing a suite of advantages that appeal to both cloud providers and other prominent hyperscalers. The company's scale and geographic diversity help mitigate the power crunch, making it a compelling option for investors seeking exposure to the data center industry.

Vertiv Holdings: Addressing the Cooling Challenge with Innovative Solutions

As the data center industry grapples with the energy-intensive nature of AI, the need for efficient cooling solutions has become paramount. Vertiv Holdings (NYSE: VRT) is positioning itself as a key player in this emerging market, offering innovative cooling technologies that address the thermal mitigation challenges faced by data centers.Traditional air cooling methods are falling short in meeting the demands of modern data centers. Vertiv's coolant distribution units (CDUs) and direct-to-chip cooling technology, which circulate coolant directly to the heat-generating components, provide a more effective solution. This technology is crucial in managing the enormous power consumption and heat generation associated with AI-driven workloads.Vertiv is well-positioned to capitalize on the growing demand for liquid cooling solutions, as the market is expected to grow at double-digit rates. With a small number of players capable of meeting this burgeoning demand, Vertiv has the opportunity to expand its margins and solidify its position as a leader in the data center cooling space.Despite the stock's impressive 85% year-to-date gain, Vertiv remains attractively priced relative to its competitors, and Wall Street expects it to deliver 30% annual earnings growth in the long term. As the data center industry continues to grapple with the energy challenges posed by AI, Vertiv's innovative cooling solutions make it a compelling investment opportunity.