Wall Street has been obsessed with artificial intelligence for more than a year, with investor enthusiasm sending tech stocks and chipmakers soaring. But attention is increasingly turning to another group of companies riding the AI wave: industry-focused companies. The Club has two in its portfolio. Eaton and DuPont are both unconventional players in AI, as the data center market expands to meet the demands of the generative AI boom. Eaton offers electrical products used in new and renovated data centers, which house the servers providing the intensive computing power needed for AI applications. DuPont’s semiconductor business is expected to gain as orders for AI server chips increase. Prominent industry players like Jensen Huang, CEO of Club Holding Nvidia, said the frenzy won’t stop anytime soon – predicting an influx of data center spending as outdated equipment is replaced by AI-enabled products and new facilities are built from scratch. “Generative AI has launched a whole new investment cycle to build the next trillion dollars of AI generation factory infrastructure,” said Huang, founder of the Club name and leading chip maker of IA, in February. “We believe these two trends will result in a doubling of the installed base of data center infrastructure globally over the next five years and represent an annual market opportunity worth hundreds of billions.” So, what’s in it for our industrial Club actions? The Wells Fargo Investment Institute last month described growing demand for data centers as having positive “trickle down effects” on the industrial sector. “We’re all talking about artificial intelligence, and almost immediately everyone’s attention turns to these (graphics processing unit) manufacturers or to the people who make the high-end computers that will be needed to do a big part of the calculations,” Sameer Samana, a senior global markets strategist at WFII, told CNBC. “But what’s really interesting are the second and third impacts, like those of manufacturers.” WFII wrote that big tech companies’ spending on data centers, in particular, creates “significant downstream impacts” for industrial companies. America’s largest cloud infrastructure companies – club names Amazon, Microsoft and Alphabet – all play a role in data center growth. Amazon Web Services is reportedly investing nearly $150 billion in data centers over the next 15 years to support AI efforts. Another recent media report said that Microsoft and its partner OpenAI are planning a massive data center project that could cost up to $100 billion. Jim Cramer also discussed this trend in his recent Sunday column. McKinsey analysts, meanwhile, predicted in January that U.S. data center power consumption would increase by about 10% annually between 2023 and 2030, as more companies integrate AI. This goes straight to the heart of electrical components and energy management giant Eaton. It is the most direct beneficiary of the data center investments in our portfolio. And its stock price reflected it – closing at a new all-time high of $330.51 per share on Friday. Even with some weakness in recent days, the stock was still up about 30% year to date. ETN Year-To-Date Performance for Eaton (ETN) Data centers are one of Eaton’s largest end markets, accounting for approximately 14% of the company’s sales last year. Eaton sells electrical energy management solutions to these facilities so they can operate more efficiently and safely. Its products include specialty circuit breakers, energy management software and various electrical components. The growth of data centers aimed at AI workloads, in particular, is beneficial for Eaton. AI data centers require higher power and power density than a more generalized computing installation, the company said, meaning they contain more electrical content. During the company’s most recent quarterly earnings conference call in February, Eaton’s then-CFO said two of the company’s largest operating segments — Electrical Americas and Electrical Global — had both benefited from the strength of data centers. Management also presented a bullish outlook for 2024 alongside the numbers, forecasting strong double-digit revenue growth for this end market. The Club says that as more data centers are built, customers will need more of Eaton’s offerings. In the long run, this will help fuel sales growth company-wide. “Most of the ancillary elements of the data center are done by Eaton,” Jim Cramer said during Monday’s morning meeting. “Eaton is part of this big change in the network that we’ve been talking about,” he said last week after Barclays upgraded the stock to its sell-equivalent rating and increased its price target from $250 to $300 per share. Wall Street analysts echoed the Club’s sentiments. RBC Capital Markets upgraded Eaton’s shares to a buy-equivalent rating on Friday, describing the stock as “the best way for large-caps to play in today’s electric supercycle.” RBC analysts argued that Eaton has “the best overall data center exposure” in their coverage, forecasting that the industry name could likely exceed its own growth expectations. “We believe Eaton’s estimate of a 10.8% compound annual growth rate over 5 years through 2028 for its data center and computing businesses may prove conservative,” they wrote. analysts. Overall, Eaton has been a huge win for us since our first investment late last year. Long-term, we’re excited about its exposure to other megatrends like infrastructure spending and reindustrialization – efforts bolstered by the U.S. government’s approval of more than $1 trillion in spending bills. expenses. The Club made its first purchase of Eaton shares at $226.79 apiece on November 15, with the stock soaring nearly 40% since then. Eaton hit a record Friday. The Club has a 1-equivalent Buy rating on Eaton stock and a price target of $330 per share. DuPont De Nemours’ (DD) annual mountain performance year-to-date DuPont is also expected to benefit from increased data center demand, although less directly than Eaton. In particular, DuPont’s Electronics and Industrial segment, which accounts for about 44% of its revenue, could benefit from a boost. Within the division, DuPont owns smaller companies like Semiconductor Technologies and Interconnect Solutions that create materials used in the chip manufacturing process, as well as other high-performance computing solutions. They include offerings used in advanced chip packaging and coating. Building more data centers — and even retooling existing facilities for AI computing — means an increased need for servers full of chips, driving demand for semiconductor manufacturing and the DuPont products used in that process. We heard this recently from management. At a Barclays investor conference in February, Chief Financial Officer Lori Koch said DuPont’s data center and exposure to AI would help boost the company’s electronics business. She believes DuPont’s Semiconductor Technologies segment is at the start of a multi-year recovery. The company expects industry-wide silicon wafer shipments to grow 6% to 7% in 2024, Koch said, with DuPont’s semiconductor business outperforming that figure by about two to three percentage points in due to its exposure to “data centers, AI and more advanced chips.” “. At the Feb. 21 event, Koch said DuPont’s semiconductor segment generated about $700 million in data center-related sales, out of a total of $2 billion. About $250 million of dollars are tied to AI, according to Koch. While that number may be “small,” Koch said it “is a very good clip for us.” DuPont company-wide was worth $12.1 billion in 2023. The Club is optimistic about any growth in DuPont’s electronics and industrial businesses, as the stock’s recovery has been one of the main reasons we initiated our stake in August, at $78.41 per share. However, China weakness and inventory destocking weighed on the company, prompting a disappointing fourth-quarter earnings announcement earlier this year which caused the stock to fall and led us to revise our price target downward, to $78 per share. In February, when DuPont reported its full quarterly results, management said the company expected a broad-based recovery and continued to see demand stabilize for the semiconductor technology and interconnect solutions businesses while throughout 2024. The stock recovered from its predicted fall before the announcement and was trading near $77 on Tuesday. Although it remains slightly below the point where the Club initialized its position in August, multiple buying on weakness places our cost basis at $74.71 per share. The Club has a rating of 1 on the stock. (See here for a complete list of what Jim Cramer’s Charitable Trust does.) 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Stadia data center where it runs games in the cloud.
Wall Street has been obsessed with artificial intelligence for more than a year, with investor enthusiasm sending tech stocks and chipmakers soaring. But attention is increasingly turning to another group of companies riding the AI wave: industry-focused companies. The Club has two in its portfolio.
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