By Christopher D. Morgan, CFA, CFP®, CAP
Senior Vice President, Senior Portfolio Manager
The past three years’ investment dashboard has centered most prominently on the “Magnificent 7,” a group of the U.S.’s largest and most innovative and dominant tech companies at the top of the AI adoption and enabling ecosystem. Of course, OpenAI, a private company, is also known to many as the chief catalyst for the AI revolution, beginning with its ChatGPT launch in November 2022. Accordingly, these firms have also seen their share prices and valuations rise dramatically during the period. But this widespread recognition could also bring lower returns and higher risk, best reflected in the current 35% weighting of the “Mag-7” in the S&P 500.
Our investment team at Florida Trust, while favoring many of these leading firms, believe that a basket approach, albeit one at lower concentration, will serve investors well. We also recommend looking further afield from the “crowded trades” for other opportunities as AI proliferates and diffuses through the economy.
For example, the AI investment theme has driven a renewed focus on several peripheral industry groups, such as industrials and utilities. A chase for turbines, such as those sold by GE Vernova, Siemens and Caterpillar, to co-locate with the flurry of new datacenters, is running in parallel with the much more documented chase for the world’s most advanced chips, made by the singular Taiwan Semiconductor. While the tech universe has garnered all the headlines, the S&P Industrials sector has quietly been a top performing group, up some 18% for the year.
The other key bottleneck, and potential source of opportunity, will be in generating the power needed to light these datacenters. Current estimates suggest the U.S. stands at a 44-gigawatt aggregate power shortfall to meet the currently forecasted AI growth trajectory, just through 2028. For reference, one gigawatt is roughly enough to power 750,000 homes. This makes the utility sector a direct beneficiary from broad AI adoption. Utilities often conjure the image of stodgy operators, with highly predictable but unspectacular cash flows and earnings – and therefore modest valuations that are historically price/earnings multiples of approximately 15x. This stems from the highly regulated regime they operate under, whereby state controllers review and approve their investments, rates and essentially profit margins. They are monopolies without monopoly power, with limited growth prospects.
But now they are proxies for AI demand, and some of them have seen the type of share price appreciation and valuations you would normally expect from less traditionally defensive sectors. Two such examples would be Constellation Energy and Dominion Energy, utility plays whose coverage areas in Virginia includes Loudoun County, dubbed “Datacenter Alley,” as the largest concentration of datacenters in the world, with more than 25 million square feet of floor space.
There are several other second-order investment opportunities that could benefit from AI. Data center Real Estate Investment Trusts, such as Equinix and Digital Realty, own and operate datacenter infrastructure. Even further upstream on the adoption side, several companies are utilizing AI technologies to gain competitive advantage. In some cases, AI has driven a higher quality product or service, such as Netflix, to better personalize content recommendations, or Meta in improved ad-targeting for its customers across its social media platforms Facebook, Instagram and Threads. In other cases, AI technologies have allowed companies to increase profit margins through cost efficiencies, such as Walmart, which applies AI in inventory management to reduce waste.
The AI landscape is changing fast, and the portfolio management team at Florida Trust stands ready to navigate through the rapidly changing, complex and expanding AI landscape.
About the Author
Christopher D. Morgan, CFA, CFP®, CAP is a Senior Vice President and Senior Portfolio Manager at Florida Trust Wealth Management in Sanibel and Fort Myers, who advises and cares for clients and their families throughout Southwest Florida by providing individualized wealth management through life’s transitions. For more information, please visit FloridaTrust.com.
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