The rapid advancement of artificial intelligence (AI) and the ever-increasing reliance on data have made digital infrastructure, particularly data centers, a focal point for investors. As AI technology continues to evolve, data centers are becoming the new backbone of the digital economy, much like railways and pipelines were during the industrial revolution. This article explores the key issues and opportunities for investors considering digital infrastructure as a core investment theme within their portfolio.
The AI Boom and Its Impact on Data Centers
AI, especially generative AI, is poised to revolutionize multiple sectors of the economy. According to recent reports, generative AI alone could add between $2.6 and $4.4 trillion to annual global GDP. The surge in AI applications, including machine learning and data-driven decision-making, is driving unprecedented demand for data center capacity. These centers house the vast amounts of data required to train and deploy AI models, making them critical assets in the digital age.
Key Considerations for Investors
Demand for Data Center Capacity: The amount of data generated globally is growing at an exponential rate. In 2024 alone, the world is expected to generate 1.5 times the digital data it did just two years ago. This growth is driven by two primary megatrends: the migration of data to the cloud and the rise of AI. Hyperscale data centers, which are large facilities designed to efficiently handle massive data loads, have been the main beneficiaries of this trend. The chart below illustrates the rapid growth in data generation and its correlation with the increasing demand for data centers.
Geopolitical and Economic Factors: The geopolitical landscape significantly impacts the data center industry. For instance, the competition between global tech giants to dominate the AI space is leading to an investment arms race in AI capabilities and infrastructure. Moreover, regional differences in energy costs and availability of renewable energy sources influence the location and operation of data centers. The below chart Bridgewaters report Are We on the Brink of an AI Investment Arms Race highlights how expanding and modernizing electricity grids is essential to support the growing demand from data centers.
Energy Consumption and Sustainability: Data centers are highly energy-intensive, consuming large amounts of electricity to power and cool servers. The drive towards sustainability and the integration of renewable energy sources are becoming crucial considerations for data center investments. Investors should look for data centers that prioritize energy efficiency and have access to abundant renewable energy. The chart below shows that AI-focused data centers are increasingly integrating renewable energy to meet sustainability goals.
Technological Advancements and Future-Proofing: Not all data centers are created equal. The ability to value and future-proof these investments is essential. This includes understanding the specific requirements of AI workloads, such as the need for powerful computing capabilities and low latency for AI inference models. Additionally, data centers that can adapt to evolving technological needs will likely outperform those with outdated infrastructure. Data centers must evolve to support AI training and inference models, which have different operational needs.
Regulatory and Security Challenges: The increasing importance of data centers also brings regulatory scrutiny and security concerns. Data privacy, cybersecurity, and compliance with local and international regulations are critical issues that data center operators must address. Investors should ensure that data center investments have robust security measures and comply with relevant regulations to mitigate risks.
Gaining exposure to this theme within Investment Portfolios
Investors looking to capitalize on the digital infrastructure boom should consider a diversified approach, incorporating various stakeholders within the AI, data centre and related infastructure industries. We are currently considering various market-linked securities such as directly listed Australian and International shares, managed funds, and ETFs.
Hyperscale Data Centers: These facilities are central to the growth of AI and cloud computing. Investments in companies that build and operate hyperscale centers, particularly those with strong relationships with tech giants like Amazon, Google, and Microsoft, are likely to yield significant returns. The below chart gives a sense of this contribution towards return for securities captured within Chips, Cloud, Power etc.
Renewable Energy-Integrated Centers: Data centers that leverage renewable energy sources are well-positioned to meet the growing demand for sustainable operations. Investing in companies focused on green data centers can provide both financial and environmental benefits.
Edge Data Centers: As AI applications increasingly require low-latency processing, edge data centers located near end-users will become more important. These centers support real-time data processing and can be a strategic investment as the demand for AI-driven services grows.
In Summary
The rise of AI and the explosion of data are driving a fundamental shift in digital infrastructure investment. As data centers become the hubs of this new digital economy, investors have a unique opportunity to capitalize on this trend. However, navigating this landscape requires careful consideration of various factors, including demand dynamics, energy consumption, technological advancements, and regulatory challenges.
For investors seeking guidance and support in this evolving market, we are here to help. Our expertise in financial planning and investment strategy can provide you with the insights needed to make informed decisions. Contact us to learn more or to schedule a detailed discussion about your investment goals and how to navigate the opportunities in digital infrastructure.
DISCLAIMER
Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.
This communication is based on information from sources believed to be reliable at the time of its preparation (June 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
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