AI's Power Problem

Brit Ryle

Posted April 27, 2024

Both Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG) reported excellent earnings last night. Just when the stock market really needed a shot in the arm, too. 

As of last Friday, April 19, the S&P 500 was down around 5% from its all-time high, set on March 28. Investors needed some good news to stop the slide, Microsoft (up 3%) and Google (up nearly 10%) delivered. 

These earnings reports are taking the entire group of AI stocks higher – Nvidia (NASDAQ: NVDA), AMD (NYSE: AMD), SuperMicro Computer (NASDAQ: SMCI), Snowflake (NASDAQ: SNOW) – they all made nice gains. Meta (NASDAQ: META) even managed a small gain after its disastrous sell-off earlier this week.

The numbers that the leading AI companies put up are pretty incredible. Microsoft’s Azure cloud platform grew revenue by 31%. Google’s Cloud business beat profit estimates by almost 50%. 

These are $2 and $3 trillion companies, growing revenue at rates that we usually associate with much smaller companies. And I expect we’ll l get treated to some more incredible numbers when Nvidia (NASDAQ: NVDA) reports earnings in about a month.

That’s because Nvidia is a big beneficiary of another remarkable aspect of the big AI companies: their spending. 

In the first 3 months of this year, Google’s spending doubled to $12 billion. Microsoft spent $14 billion. A good chunk of that money was spent on Nvidia chips. And both companies said their spending will rise in the quarters ahead. 

Now, much of the tech side of all this spending is pretty well understood and appreciated. Microsoft, Google, and Meta will keep buying Nvidia chips. This is why Nvidia is valued at 34 times its revenue and its stock price is nearly $900. 

In other words, yes, there is likely still some upside for Nvidia and other AI tech stocks. But it likely won’t be the 200% and 300% gains like what we’ve seen over the last couple of years. 

The next huge AI winners will come from the energy space. Because AI has a big energy problem…

AI’s Energy Problem

The data centers that power Artificial Intelligence (AI) applications like ChatGPT currently consume around 2% of the entire world’s electricity supply. That’s about equal to the amount of electricity Brazil uses in a year. And it’s not like Brazil doesn’t use much electricity – it comes in at #6 on the list of countries and their electricity use. 

Japan is #5 on the list of countries and their electricity use. It uses around 30% more electricity than Brazil. The International Energy Agency (IEA) says that data centers will match Japan’s electricity use in less than two years. 

It’s not just the electricity supply itself that is being taxed by insatiable demand. It’s the whole electricity ecosystem: high-speed transmission lines, copper wiring, transformers, steel, nuclear, solar, geothermal, hydrogen – anything that can generate electricity and carry it to data centers is at the start of a massive bull market. 

We’re going to be talking a lot more about electricity generation and transmission stocks in the future, but I’ll get you started with one today: NuScale Power (NYSE: SMR). 

NuScale has just $22 million in revenue over the last 12 months. It is valued at $500 million, has $120 million in cash and no debt. NuScale is basically a start-up, it’s currently moving from R&D to commercialization of its tech.

As for its tech, the ticker symbol SMR gives it away: small modular reactor. Yes, as in nuclear. The company has devised a small water-pressurized reactor that can generate 750 megawatts of electricity. NuScale’s SMR is the only one that’s been certified by the Nuclear Regulatory Commission. 

The stock trades right around $6 a share. Definitely worth a look…

Briton Ryle

Chief Investment Strategist
Pro Trader Today