Are Data Centers AI Winners or Losers?
CNBC recently posted an article indicating that a data center stock is a potential ‘under-the-radar’ artificial intelligence (“AI”) investment opportunity. The premise of the argument is simple: increased compute needs from the adoption of AI will drive demand for datacenters, which house & provide the compute necessary for AI applications. But are simple stories enough when looking at second or third level effects of an emerging phenomenon, which is what the author of the article did?
When we evaluate investment opportunities, part of the process is to understand the risks associated with an opportunity. Here, data centers can provide the compute necessary for AI applications. However, there are longer-term concerns related to:
- Energy usage of data centers as it relates to electricity consumption and greenhouse gas emissions.
- Future competitiveness of existing compute and data storage technologies (central processing units/graphical processing units and hard drives).
On the first point, there are numerous regulatory trends driving towards net zero, which indicates that emissions from data centers must halve by 2030 (source: International Energy Agency, IEA). On the second point, changes to data storage technologies are possible but not widely acknowledged.
The benefit of managing both public and private investment mandates is that we can take insights from either opportunity-set then apply lessons learned from one to the other. In this case, Validus covered public data center REITS prior to making an investment in Iridia–a company using synthetic DNA to store data. An interesting thing we learned during our due diligence is the amount of DNA in a human body (roughly 1 gram) has the data-capacity of 10 billion, 6 terabyte hard drives–which is the current standard data-storage medium. The question is twofold:
- What does using synthetic DNA to store data mean for the long-term real-estate demands from data centers?
- And would changes in technology, such as the commercialization of synthetic DNA storage, reduce real estate requirements sufficiently to offset any long-term change in demand for AI workload compute that only recently came into vogue?
We think so. And we remain confident in our prior move away from data center REITs.
As our CIO, Mark Scalzo, noted in his prior blog on Nvidia, there are drivers in the short run to increased demand, such as AI, but the growth of such technologies will normalize from current levels as companies understand the use cases for AI in their industries and implement solutions that make economic sense. In addition to the normalization of growth rates after the initial rapid-growth stage, the long-term implications of data storage density advancements pose a significant threat to data centers.
The moral of any short-term growth stories is, beware of confirmation bias via price momentum when looking to find secular growing companies and industries.
The Destra Multi-Alternative Fund that is sub-advised by Validus invests in Iridia and Nvidia. Securities highlighted or discussed in this blog have been selected to illustrate Validus’s investment approach and/or market outlook and are not intended to represent any strategy or portfolio performance or be an indicator for how strategy or portfolio have performed or may perform in the future. Each security discussed in this blog has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and in the aggregate may only represent a small percentage of a strategy or portfolio holdings. The strategies and portfolios are actively managed and securities discussed in this blog may or may not be held in such strategy or portfolios at any given time. These individual securities do not represent all of the securities purchased, sold, or recommended and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Nothing in this blog shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this letter.
Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.
Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.