{"id":13189,"date":"2024-05-29T16:55:51","date_gmt":"2024-05-29T16:55:51","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=13189"},"modified":"2024-05-29T16:55:52","modified_gmt":"2024-05-29T16:55:52","slug":"the-impact-of-ai-on-utilities-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/the-impact-of-ai-on-utilities-stocks\/","title":{"rendered":"The Impact Of AI On Utilities Stocks"},"content":{"rendered":"\n

Chris R. from Boston, MA asks:<\/em> Hello Mitch, I read an article last week about how much energy is currently needed, and will be needed, to power artificial intelligence and all of the data centers that go with it. The article suggested that Utility companies that are selling this power could see a massive increase in demand. Your thoughts? Is there an investment play here?<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thanks for sending an email with your question, Chris. It\u2019s a good one.<\/p>\n\n\n\n

Utilities stocks have customarily fallen into a \u2018defensive\u2019 category, known more as income-generators than growth engines. Over the last five years, for example, Utilities shares are up an average of 6.6% annually, less than half the S&P 500\u2019s 15.7% average annual return over the same period.1<\/sup><\/p>\n\n\n\n

Utilities stocks can also be vulnerable to higher interest rate regimes since rising yields increase borrowing costs and make bonds look more attractive by comparison. Case in point: in 2023, when interest rates were moving higher, the S&P 500 Utilities sector sank by -7.1% while the S&P 500 soared 26.3%. This gap marked the largest underperformance since 1999.<\/p>\n\n\n\n

But as you indicate in your question, 2024 has looked a lot different for Utilities stocks, and for the reason you mentioned\u2014Artificial Intelligence (AI) requires enormous amounts of computing power, which requires a lot of electricity. If the proliferation of AI infrastructure, tools, and companies takes hold as many anticipate it will, power demand could grow significantly as well.<\/p>\n\n\n\n

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This shift in demand would be a departure from what the U.S. has experienced over the past two decades or so. According to the Energy Information Administration, the U.S. generated slightly less electricity in 2021 than the country did in 2007, thanks in large part to energy-efficient technology and conservation efforts. Looking forward, however, increased demand is expected to originate from the \u2018onshoring\u2019 of manufacturing, major investments in semiconductor production (fabs), and the expansion of data centers as you mentioned in your question. By some estimates, electricity demand from data centers alone could grow by 15% annually over the next decade.<\/p>\n\n\n\n

Before investors go running out to overweight Utilities, however, there are a few key factors to consider. First is that Utilities\u2019 hot streak has only been going on for a month, yet all of the excitement over AI has been ongoing for years now. AI was the biggest topic in markets in 2023, and Utilities was the worst-performing sector. The amount of energy needed to power computers was known throughout this time, so this isn\u2019t breaking news. The same goes for \u2018onshoring\u2019 and semiconductor investment, which have been themes for a couple of years now.<\/p>\n\n\n\n

Another factor to consider is that increasing power demand does not necessarily mean increasing earnings. If forecasts for power demand and electricity consumption are all correct, Utilities will likely need to make significant investments in expanding the power grid and developing more energy infrastructure, generation, and transmission. This can get costly fast, and a higher-for-longer interest rate environment could cloud the economics of scaling.<\/p>\n\n\n\n

In short, investors should remember that there is not a straight line between rising power demand and rising Utility company profits, which means the bull case for Utilities stocks is not as straightforward as some are currently making it out to be.<\/p>\n\n\n\n

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\u2022 Americans think the Economy is lousy. Is it?
\u2022 Update on inflation & the Fed
\u2022 The market\u2019s Fed exuberance
\u2022 Bottom line for investors<\/p>\n\n\n\n

If you have $500,000 or more to invest, click on the link below to get our free guide today!<\/p>\n","protected":false},"excerpt":{"rendered":"

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