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If there were any lingering doubts about the AI boom's strength in the stock market and broader economy, Nvidia (NVDA, down 3.16%) has effectively eliminated them. The AI chip titan recently reported impressive Q1 2024 earnings, boasting a 262% overall revenue growth and a staggering 427% surge in the data center segment.
These figures may not have been entirely unexpected for dedicated stock watchers, but they still surpassed expectations and added approximately $200 billion to Nvidia's market cap. In addition, Nvidia CEO Jensen Huang hinted at the AI market's ongoing evolution and soaring demand, outpacing supply.
One of the most captivating aspects of Nvidia's report was the revelation that 40% of data center revenue stemmed from AI inference. This means training, a different component of generative AI models, likely accounted for a substantial portion of the quarter's income as well, as both functions were reported to be growing "significantly."
This development is crucial because infrastructure for AI inference, which follows training, is expected to eventually form a sizable share of data center demand. If current AI inference demand lags behind AI training demand, it suggests that organizations relying on generative AI remain in the very early stages of maximizing their demand for AI.
The AI-driven energy struggle
Generative AI models require substantial amounts of power, a factor that has mostly gone unnoticed during the generative AI boom. Estimates on the generative AI-induced power consumption vary, but some expect it to transform the electrical grid as dramatically as the spread of central air conditioning in the 1960s. Goldman Sachs predicts a 160% surge in data center power demand by 2030.
In this AI-driven energy crunch, utility companies like Dominion Energy are likely to emerge as major winners. Dominion Energy's primary profits derive from Virginia, a state where the company enjoys a regulated monopoly in utilities. The corporation's annual report highlights that it faces no competition in the electric distribution service, and no such competition is currently permitted.
Virginia is a significant market for data centers, with Northern Virginia serving as the largest global data center hub, and the state holding around 35% of the global share of hyperscale data centers, including those operated by major cloud computing customers such as Microsoft Azure, Amazon Web Services, and Alphabet's Google Cloud Services.
As these companies continue to ramp up their AI operations, Dominion appears poised to reap the benefits. On their latest earnings call, Dominion's management acknowledged, "Northern Virginia leads the world in data center markets. In recent years, this growth has accelerated exponentially."
The perfect time to invest
Typically, utility stocks are prized for their dividends, particularly in times of economic downturns when they provide a reliable income source. However, many utility stocks have plummeted in the past two years, as the higher interest rates led investors to park their money in bonds offering over 5% interest. This decline is evident in Dominion's three-year performance, with the stock losing 33% even as the S&P 500 reached new all-time highs.
At current, Dominion offers a 5% dividend yield, making it an appealing option for income investors. By purchasing Dominion stock now, investors can capitalize on the stock's potential recovery alongside interest rates and anticipate growth in data center demand in the long term within Dominion's home market of Virginia.
Investing in Dominion stock may well represent an opportunity to harness the power of the generative AI boom.
Enrichment Data:
- Energy Consumption:
- Current Consequences: AI inference operations consume considerable energy. A single rack of Nvidia GPUs can consume up to 120 kilowatt-hours daily, equivalent to the energy usage of 4.5 common U.S. homes[1]. Total power requirements for global data centers have climbed rapidly, with estimates suggesting that AI will contribute around three New York Cities' worth of electricity demand to the U.S. grid by 2030[1].
- Future Challenges: The power demands of data centers in North America rose from 2,688 megawatts at the end of 2022 to 5,341 megawatts at the end of 2023, predominantly driven by generative AI[2]. By 2026, data centers could consume around 1,050 terawatts, making them the fifth-largest electricity consumer globally[2].
- Revenue Impact:
- Current Consequences: The rapid growth in AI demands has fueled a surge in data center construction and operation. Data centers are increasingly vital for the global economy, particularly with the advent of cloud computing, and are consuming a gigawatt or more of power, equivalent to twice the residential electricity consumption of Pittsburgh last year[3].
- Future Projections: The data center market is projected to expand at a 15% Compound Annual Growth Rate (CAGR) through 2027, with some estimations suggesting a potential upside of 20% CAGR through 2027[4]. This growth is fueled by artificial intelligence's relentless advancement and the need for more powerful data centers.
- Impact on Utility Companies:
- Current Challenges: The escalating power requirements of data centers are pressing against electricity grids worldwide. Rapid electronic degradation, electrical fires, and aging power grids are becoming significant concerns. Power grids across the globe are approaching the end of their lifespan, with efficiency decreasing due to continuous electrification efforts within various industries[3].
- Potential Solutions: To combat these challenges, utility companies and data center operators must collaborate to establish data centers as assets to the grid rather than liabilities. Increasing the use of natural gas within data centers could provide a temporary solution to reliably power much of the demand while pursuing sustainability goals[3].
Despite the substantial energy consumption of AI inference operations, leading to an anticipated 160% surge in data center power demand by 2030 according to Goldman Sachs, utility companies like Dominion Energy could significantly benefit. As a major player in Virginia, a state with a large share of global hyperscale data centers, Dominion is well-positioned to capitalize on the growing demand for electricity in the data center sector. With its current 5% dividend yield and promising long-term growth potential in its home market, investing in Dominion stock may be an attractive option for those looking to harness the power of the generative AI boom.
Given the surge in data center power demand due to generative AI, efficient collaboration between utility companies and data center operators is necessary to establish data centers as assets to the grid instead of liabilities. This partnership could help in combating challenges such as rapid electronic degradation, electrical fires, and aging power grids, which are becoming significant concerns as electricity grids worldwide approach their lifespan limits.
