Electric Utilities: The AI Boom “Picks and Shovels” Play That’s Been Ignored
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Electric Utilities: The AI Boom “Picks and Shovels” Play That’s Been Ignored

Story Highlights

Electric utility stocks may be a safer AI bet, given their established presence in AI hubs and the increasing demand for AI power.

The boom in AI advancement has taken the form of a gold rush for investors. While chipmakers get much of the focus, electric utility stocks, traditionally known for their stability and favored by retirees for their reliable dividends, are undergoing a revival fueled by the surging energy demands of AI. The potential of investing in electric utilities, which could be a compelling “picks and shovels” play for investors, has largely been overlooked.

AI Is Nothing Without Power

AI development and customer usage would cease to exist without electric power. The functionality relies heavily on data centers, and the AI facilities are driving unprecedented demand for electric power. In fact, there is a projected 900% increase in data center power needs in Chicago alone. This highlights the scale of the AI-generated hunger for electricity.

This demand is widespread, extending beyond Chicago to become a nationwide trend, leading utilities to boost capacity to meet the growing challenge. However, the Midwest appears to be emerging as a central hub for data center expansion. This benefits utilities like CMS Energy Corp. (NYSE: CMS). The attraction of the Midwest for data centers lies in its lower real estate costs. Nevertheless, utilities in other regions are also gearing up to accommodate the increasing demand.

Leading geographic AI hot spots like Silicon Valley and the Northeast U.S. come under the power umbrella of established and reliable electric utilities. This includes companies like Pacific Gas and Electric Company (NYSE: PCG) in California and Consolidated Edison Company of New York, Inc. (NYSE: ED), each of which is well-positioned to capitalize on increased AI demand for their service.

Utilities Outperform Tech

The market is only now recognizing the critical role that utilities play in supporting this booming technology.

So far in 2024, the S&P 500 Tech Sector (NYSE: XLK) has gained 15.11%. Comparatively, Goldman Sachs’ (NYSE:GS) “Power Up America” basket, which is focused on utilities, served up nearly twice the gains at 28%. This is a surprise outperformance that should not be surprising in this sector when one thinks about the needed inputs from the business.

Bulls on AI-Related Utilities

Analysts are bullish on the future of utilities in the approaching AI age. Ryan Levine of Citigroup (NYSE: C) calls AI “the biggest driver of the industry.” Citigroup’s Levine said, “We’re recommending buying Southern Co. (NYSE: SO) on this thesis.”

Meanwhile, on the inside track, Calvin Butler, CEO of Exelon Corp. (NYSE: EXC), said, “Artificial intelligence is poised to help drive a 900% jump in power demand from data centers in the Chicago area.”

Key Takeaway

While chipmakers are a natural first thought for AI investors, electric utilities offer a compelling alternative.

Their established presence in key AI hubs, the undeniable link between AI and electricity consumption, and even the strategic shift towards renewables make them a compelling “picks and shovels” play for investors seeking to capitalize on the long-term growth in the AI revolution.


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