For Data Centers, Power is the New Real Estate (Literally)

0:04The opportunity in data centers is increasingly looking like an opportunity in power and real estate. We're digging in today on Motley Fool Money.

0:20Today is Tuesday, January 13th. Welcome to Motley Fool Money. I'm your host, Emily Flippen, and today I'm joined by Fool analysts Anders Byland and Dan Kaplinger as we dig into data centers and the different ways investors can play on their build out without baking in too much risk. We'll walk through all the different players that are helping make data centers a reality, how sustainable the build out really is, and how mega investors are helping fund them at scale. But to start, we have to talk about why we're discussing data centers today. Of course, everyone knows large tech companies have been building data centers at breakneck speeds to help facilitate the AI ambitions that we all know and some of us love.

0:59I mean, artificial intelligence requires massive amounts of data center capacity to not only handle the queries that are being sent by you and I and enterprises to LLMs, but also to help iterate and constantly train those same models. But this is a topic that's really hitting close to home recently for individual Americans alongside investors. I know myself, I live here in Maryland. I'm just a stone's throw away from Northern Virginia. It's ground zero for data center bid in the United States. CBRE has recently released reports noting that data center vacancies are at all-time lows in the second half of 2025.

1:32Many big customers are pre-leasing out capacity into 2027 and beyond. So, for the people living nearby, this means higher electricity costs and data centers obviously require massive amounts of power to run. So, that's some of the backdrop. Dan, I want to start with the capacity. I think investors' minds often immediately turn to the fear that the data centers that we see so far have actually been overbuilt. That's given the narrative that we talk about a lot around fears around an AI bubble. But the information that we have that I just indicated, I mean, that only shows that demand has continued to outstrip supply.

2:08How does that build out look to you today? Yeah. So it's funny, Emily, because yes, I've heard those stories about how we're overbuilding data centers left and right. But the fact is that most of those data centers that we've heard about, they haven't even been built yet. Investors, I think, are reacting more to news of the planned deployment of future data centers than about data centers that are currently on the ground right now. Building completions, I mean, they're going up pretty fast, but it's not an overnight thing. There's a lot of infrastructure. There's a lot of supporting work that has to go into getting a data center up and running.

2:48It's going to take years to get all the ones that are planned actually built. Now, yes, there is some risk of a reversal if hyperscalers take their plans and get cold feet about, okay, yeah, are we going to get the return on investment that we had hoped that we were going to get? Yeah, sure, that might make people pull back on their plans to complete some of the ones that are scheduled to get done in out years. But I think we're a long way from that point. And right now, the existing data centers that are up and running and operational are not enough to take care of the current demand that AI and other intensive computing applications are requiring.

3:31Yeah, there's kind of two parts to that equation. There are the people who need the capacity in order to fund operations, to fund the queries and the training that we talked about. And there's also the people who are actually funding the projects themselves, who are offering capital. You need both part of those equations to make that work. And so far, We haven't seen cracks happening on either side of those equations, but that doesn't mean that there hasn't been public pushback just from the people who daily lives have been impacted from these expansions. And Anders, that build-out that is happening and continues to happen, as Dan mentions, it has massive implications for things like energy consumption.

4:08The IEA projects that global energy consumption for data centers alone will double by 2030. And in the United States, the Pew Research Center projects that AI-based electricity usage will rise 133 % in that same time period. So I understand that a lot of investors hear that and they think the obvious takeaway is that there's going to be a need for infrastructure investment, right? That's a great opportunity for energy investments over the next couple of years because you need energy to power those initiatives. What do you personally make of that? Yes, I mean, there is definitely that side to it.

4:41but like you said, it's a multi-layered story. The big story here isn't just that there is a big demand for more energy. It's also that the imbalance between supply and demand means that prices are rising and it's hard to keep up with the build-outs as fast as you need to. So what a lot of hyperscopers are doing is they're taking control of their own destiny and building their own energy sources. Building or buying, I should say. For example, recently Microsoft has restarted or signed a deal to restart Three Mile Island with the kind of traditional reactors that are already there, but they're going to get replaced over time with the smaller modular reactors.

5:26so nuclear power in Microsoft's hands but they're not the only ones Amazon is doing the same thing they recently bought a nuclear-powered campus with plans to install modular mini reactors and Google isn't exactly doing that instead they're signing deals with the independent companies like Nextera Energy which is another supplier of modular nuclear reactors. Nuclear is making a comeback a decade or so after Fukushima, but in a different form. And maybe this will go over okay with the people and regulators. I don't know. But it's one way to get your hands on cheaper energy. And in the long run, it's still not cheap to build, but it will get affordable to run.

6:21So that's one way to get the power you need for your data centers. It reminds me of this quote. I never watched House of Cards, but I know this quote from the Netflix TV show, which is, what is it? Powers, the new real estate, something along that line. And I think the commentaries around physical power, like the influence you have over other people, not actual energy power. But in this context, for the people who are investing and trying to make AI a reality, It is kind of the real estate that you need. And it is, I think, the bottleneck that investors are missing, which is the energy consumption that is necessary.

6:58And it's very much the real bottleneck that these hyperscalers are facing. You can have access to all the physical real estate in the world in Northern Virginia, wherever it may be. And you can have access to all the capital in the world. But if you don't have access to energy or if there are local regulations or local pushback that is preventing you from being able to access the energy that you need to run your data centers, then you lack the power, you lack the influence to actually make your dreams, whatever they may be, your data centers a reality. So, it makes a lot of sense to me that we see companies like NextEra, Microsoft, Amazon, Google, all of these companies trying to gain access to the limited supplies of energy and power that we have that they need to now because what they're talking about in terms of the build out of data centers they need that and and right now that is the the bottleneck that exists right and it's not exactly new i know for years companies like microsoft and google have been building data centers with paying close attention to where they get their energy from and signing deals with local water power power resources in places like Canada, Northern Sweden, for that matter.

8:10There's a Google data center up in Kiruna somewhere that is powered by a local waterfall, basically. So, you know, it's not exactly new, but it's up to a new level. Yes, exactly. And that's why I'm so excited about this opportunity because so many people stop that one level of degree where they think about data centers and they think about the companies physically building data centers and they don't get to the next degrees of separation about the companies that are helping make data centers a reality. So up next, we're going to be breaking down the investment opportunities for data centers, but at different points on the value chain.

8:44So stick with us. We're going to be taking that one step further, talking about some specific companies benefiting from the AI data center build out. In January of 1915, Ernest Shackleton's ship, Endurance, became encased in the ice in the Weddell Sea. Through determination, grit and savvy, Shackleton would lead his men through a brutal winter, then over hundreds of miles of Antarctic ice, followed by 800 miles across some of the roughest waters in the world. It is one of the most extraordinary and inspirational journeys in the history of exploration. Find this story and many others at the Explorers Podcast, available wherever you get your podcasts or at explorerspodcast.com.

9:21Welcome back to Motley Fool Money. We're discussing data centers and the businesses that not only benefit from them, but also help make them a reality. Luckily for investors, There are plenty of stocks that are playing critical roles in this value proposition from operators, REITs, energy, and the like. In our last segment, we'll get to some picks and shovels plays. But for now, let's keep it to the direct beneficiaries. Anders, I want to start with you. If an investor wants public market exposure to the data center build out, where are you sending them first? So one stock I'm really excited about in this space is HP, HP Enterprise.

9:55one half of the old Hewlett-Packard conglomerate that's been around for decades. But it split up in two parts about 10 years ago, and HPE has become a giant in building high-powered computer systems, which is perfect for the kind of data centers that AI hyperscalers need. When you look at the top 500 list of supercomputers these days, in the top 10, about six of them, I believe, were built by HPE in the last update in November. And these guys know how to build really high-powered systems. That comes in handy at this point. So despite HPE's muscle in the data center space, where they can provide anything from the actual supercomputers to now with Juniper Networks under its belt, the networks that put them together and feed data from one part of the system to another and then out to the world.

11:03They build everything except the building, basically. And despite this strong position, the stock is trading like an absolute bargain with a forward PE around 8 and a price turn to growth ratio about 0.5. Anything below one is supposed to be a bargain, and this is a good bargain. Price to sales is under one, too. It's like, you know, you're buying a Walmart stock here, but you're getting an AI powerhouse instead. So it's hard to beat that in my book, and I'm actually excited about boring old HPE at this point. It's so interesting to hear you mention HPE, because when I think about HPE, I think about the company that it probably was a decade ago, more than a decade ago, which was the consumer electronics laptop company.

11:59I think it was the brand that made my first laptop, but they've spun off their consumer business now. And this is a business that is trying to reinvent itself. Making that acquisition of Juniper has given it exposure to the AI data center boom and build out its valued legacy business. And to an extent, I can understand why. I think Wall Street, myself included, as part of that, have a maybe outdated view of this company. It's valued maybe a bit like a value trap, but if they're able to get some of that exposure and get that return to growth of the AI data center build-out, you can also understand how this is a business that has a management team that is trying to turn things around and is forward-thinking in a way that the market is just simply not giving them credit for.

12:42I think it's incredible. We've been doing this podcast and talking about AI and data centers for so many years now. And nobody, Anders, has mentioned HPE before. HPE, I should say, before. So, it's certainly one for us to dig into more. Dan, I want to pass it to you. What data center or even really data center adjacent opportunities do you think are going underappreciated by the market today? Anders has hit the bar high with HPE. I don't know if I'm going to get that high, but Emily, you and Anders were talking earlier about hyperscalers building out their own data center installations. And that's been a big part of the demand, but there is a whole class of different companies, the real estate investment trusts that concentrate on data center being a third-party data center provider.

13:26And they're doing their own installations. Some of these companies are specifically doing data centers, in particular, Digital Realty Trust, ticker DLR, is the most obvious company in this space. They have really hammered down on the data center opportunity. But you've also seen some other real estate investment trusts jump in. Companies like Equinix, which is ticker EQIX, Iron Mountain, ticker IRM, and even American Tower, ticker AMT. You might know these REITs, they've did different things in the past. For instance, American Tower really concentrated on building cell towers for 5G wireless networks.

14:06But the data center opportunity really has just been so strong that these companies haven't been able to resist the allure of diversifying their businesses. And so, a lot of companies really trying to get data centers on the ground in whatever way they can. Well, after me talking about how power is the new real estate, maybe real estate is the new real estate. Maybe real estate isn't really getting disrupted. You still do need the physical assets there. So it's good to mention some of the REITs that are still benefiting from the data center build-outs as well. But up next, we're going to move on to what is, I think, my favorite segment of today's show.

14:43We're going to be digging into the real picks and shovels of data centers, some of the under-recognized businesses that help make them a reality. So stick with us. Every Sunday, we get together to talk about the week's tech news on This Week in Tech. Hi, this is Leo Laporte. I hope you'll join us for this week's TWIT. We're covering CES. It was an amazing show. Jennifer Patterson-Tooie covers home automation for The Verge. Jason Heiner covers AI for The Deep View. And Father Robert Ballasier, the digital Jesuit, has his top five picks. Plus, watch out for falling robots. There were a few of them.

15:18I tried to reach, as it came towards me, my instinct was to try and help it, you know, and stop it. And I put my hand out. Oh, my God. It's heavy. You're a humanoidist, because if that was not a humanoid robot, you wouldn't have tried to catch it. This week, it's TWIT and our CES coverage. You'll find it on our website, twit.tv, or wherever you get your podcasts. Welcome back to Motley Fool Money. As we wrap up today's show, we're going to discuss some even more under-the-radar businesses that are operating as the picks and shovels of AI data center buildouts. These are the type of opportunities that are my personal favorites.

15:52And I have to call out one or two here just for fun. For example, when I was running the Marijuana Masters Investing Service here at The Fool, We were always looking for these types of ancillary opportunities that benefited from things like cannabis legalization without being overly indexed to it. And one such example was a company called Aeon Inc. Their ticker symbol is A-A-O-N. They were a custom or are a custom HVAC manufacturing company that was actually one of the first businesses to help make custom heating systems for cannabis greenhouses in North America. And ironically, Aeon is actually also has exposure to the data center build out too, because they made an acquisition of a company called Basics a couple of years ago that helps manage thermal cooling for hyperscalers.

16:35I mean, these are the types of companies that you would never otherwise hear about that still massively benefit from the expansion of data centers that when everyone else is focused on the hyperscalers of the world, these are the kind of quiet beneficiaries. So, Dan, I already mentioned Aon. Are there any ancillary or picks and shovels plays for data centers that are on your radar? Yeah, there's a ton of companies out there that have traditionally been in low-growth areas that turn out to have specific expertise that's vital for data center construction and operation. It's really helped them take off and generate a whole new growth story.

17:10Sterling Infrastructure, for instance, ticker STRL, it's traditionally done more civil engineering work. If you've driven on a highway or you've driven over a bridge, odds are good they may have had something to do with that. But Sterling has also moved into providing concrete pads and design work on data center installations. They've also done work on some of the systems that go into them. And just the project management to get these data centers completed, Sterling has turned into a real business. Yeah, it's funny you mentioned Aon. There's a couple of other companies that I'm looking at that are kind of in the mechanical, electrical, and cooling area.

17:53Comfort Systems, ticker FIX, has particular expertise in HVAC applications. Data center refrigeration has become a new focus. And then MCOR, ticker EME, kind of similar exposure to electrical plumbing. A lot of just the innards of these data centers you don't think of. You generally think of just rows of computers. But there's a whole bunch of other duct work and work that goes into making these data centers a reality. It's these companies that are benefiting from it the most. It kind of hit some investors' radars already, but I think there's still a lot more room for them to continue to grow in the years ahead.

18:31So, I know Comfort Systems and MCOR, for the listeners who are members of Stock Advisor, are probably pretty familiar because those are two recommendations on the hidden gem side of the scorecard. Since this is the Tuesday Rule Breaker Focus Hour, I have to balance the score here, Dan. And I have to talk about another company, actually, that fits really well. That's on the rule-breaker side of the scorecard, a company called Stantec. And as you were talking about Sterling Infrastructure, it reminded me a little bit about Stantec. The ticker is STN. That's on the rule-breaker side of the scorecard.

19:00They're a Canadian design-focused engineering consultant company. And they also have, it's single-digit exposure in terms of top line, but exposure to the data center build-out as well, helping design projects, as well as some energy projects and infrastructure, that sort of thing, for data center build-out in North America. So there's just so many unique ways to play it. I love those stocks. Anders, what about you? Anything you're watching that's benefiting from data center buildouts, but not, say, overexposed to it? Right. So Dan was talking about the plumbing that goes into data centers, and mine is one of those.

19:33You have power generation. You have AI systems. You need to connect them together so they can actually run on that power. And one of the specialists in that is Schneider Electric. may sound like a German company or something, but it's actually French. And trading on the over-the-counter market instead of the NYSE or NASDAQ, which leaves it out of the media circuit. And a lot of people won't recognize it. But if you walk into your local Lowe's or Home Depot or any other hardware store and wander into the electrician's department, you will find that a good chunk of the electric gear there is made by Schneider Electric under the name Square D.

20:25It's like about one third of the breaker panels and the electric switches you'll find in the local hardware store. But it's not just for residential construction. They also make power panels, switches, everything you need to get electricity from point A to point B in a data center. And data center and sales are a major contributor to their growth in recent years. So Square D, by the way, was an all-American company that Schneider bought in 1991, I believe, to get a foothold in the American market. And they're still a major player today. Thanks to that acquisition. Sometimes these deals work out.

21:16But most people won't know it as Schneider Electric, so they wouldn't know how to invest in it. And there you go. It's a fairly modestly valued stock, a little bit cheaper than Arch Rival Eaton. And, you know, it's one of those things you have to look for. You just won't stumble over it. You have to go looking for it. Absolutely incredible. I mean, after today's podcast, I think our listeners have plenty of really unique ways to play the data center build out without being overexposed or over-indexed to any single center, any single trend. Some really great businesses that are very diversified across all parts of the value proposition for data centers here.

22:03So Don and Anders, thank you both so much for joining. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Dan Kaplinger, Anders Byland, and the entire Motley Fool Money team, I'm Emily Flippen.

22:29We'll see you tomorrow.