Leave it to artificial intelligence (AI) to continue firing up the once-humdrum utility sector. As investors recognize the strong connection between the two, enthusiasm is growing. This makes sense because AI, it seems, is just getting started and yet is calling for more and more of electric utilities’ main product. The expected exponential growth of AI requires massive data centers. Meanwhile, the immense power demands of these facilities have already significantly benefited utility companies’ bottom lines.
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Powering the AI Data Centers
When you prompt AI with a task, the speed at which it responds necessitates vast server farms housed in data centers. These data centers are the behind-the-scenes magic of the AI revolution. We count on them to be there when called upon, consuming enormous amounts of electricity to keep AI algorithms running. Power demand also includes providing cooling and air conditioning for these centers. A McKinsey report predicts that power demand from IT equipment in data centers will more than double by 2030, reaching 50 gigawatts (GW). To put this in real terms, it’s equivalent to the electricity needs of millions of homes. This growth over the next half-dozen years has energized stocks of electric utilities.
Not Just for Boomers Anymore
Utility stocks have traditionally been owned by retirees because they are considered predictable. The demand for the product is seasonal but constant, so the stocks don’t experience strong rallies or sell-offs. The attraction has been that they send a dividend to the investor regularly. As the utility sector continues to be energized by AI demand, it is attracting a new generation of investors.
The Utilities Select Sector SPDR ETF (NYSE:XLU) is a prime example; it has risen by double digits in the past three months compared to the S&P 500’s (SPX) less thrilling 4.5% gain. This shift in investor focus reflects the dawning realization that utilities are well-positioned to capitalize on the data center boom.
Analysts Predict a Power Surge
Industry experts are bullish on the future of utilities. Bank of America forecasts a dramatic increase in U.S. electrical demand, rising from a sluggish 0.4% annual rate over the past decade to a projected 2.8% by 2030. This growth is largely attributed to the power demands of data centers, painting a rosy picture for utility companies.
Performance Reflects Underlying Strength
The positive sentiment surrounding the utility sector is reflected in recent stock performance. Many utility stocks have outperformed the broader market, a clear signal of investor confidence. For example, Southern Company (NYSE:SO) anticipates that there will be a significant 6% year-on-year growth in electricity sales from 2025 to 2028, largely driven by data center demand. This growth story is translating into strong stock performance, making utilities an attractive investment proposition.
Utilities’ Other Growth Story
The AI-driven data center boom is just one piece of the puzzle. The Gabelli Utility Trust portfolio manager, Timothy Winter, highlights additional factors such as electric vehicle growth and manufacturing reshoring that will further bolster demand for utilities. This multifaceted growth story underscores the long-term potential of the utility sector.
Key Takeaway
The rise of AI and its insatiable appetite for data center power is a boon for the utility sector. Many electric utilities are no longer sleepy but are instead preparing for significant growth. Investors seeking exposure to this exciting trend should take a closer look at well-positioned utility companies as they become key players in the AI revolution.
