Tech stocks absolutely killed it last week, taking virtually the entire stock market along for the ride.
The State Street Technology Select Sector ETF (XLK) soared by 7.2%, more than doubling the return of the S&P 500 Index.
The only negative sectors for the week were energy, which reacted to news that President Trump was looking to draw the Iran war to a close, and the “bond substitute” sectors (utilities and real estate), which have been losing some comparative appeal amid rising yields for bonds.
Everything else was in the green, and most sectors enjoyed one of their best weeks in months.
So … why the sudden excitement?
It seems that the gargantuan sums of money being spent on AI infrastructure are finally translating into higher revenues for the hyperscalers. Six out of the Mag 7 reported earnings over the past two weeks, and Wall Street liked what it saw.
Amazon’s (AMZN) AWS cloud division grew its sales by 37%, its fastest pace in over four years. Microsoft’s competition in the cloud, Azure, grew 43%. And Google Cloud’s revenues surged by 82%. Growth that high is unheard of at a company of that size.
And here’s where it gets crazy…
They could have grown even faster!
Both Amazon and Alphabet indicated in their press conferences that they couldn’t build out infrastructure fast enough to satisfy customer demand.
What does this mean?
It means the AI infrastructure megatrend clearly isn’t slowing down. In fact, it’s actually speeding up. And as the hyperscalers are now seeing their efforts paying off in the form of higher sales, that’s not going to change any time soon.
Of course, building the AI compute is only half the equation. Powering it is the other half, and right now the grid is losing that race. Some newly-built, state-of-the-art datacenters are literally sitting idle due to a lack of electricity.
There’s a fundamental timing mismatch. New datacenters can be thrown up quickly, but new power plants take years to permit and build.
That’s a real problem. But it also has a simple solution: industrial-scale battery storage.
Battery storage is one of the hottest corners of the AI infrastructure trade, and Tesla (TSLA) deserves a lot of credit for this. Its Megablock, a standardized, factory-built storage unit, has become the template the whole sector is now racing to copy, the same way the shipping container standardized global trade seventy years ago.
The power business that Tesla created is too big for any one company to handle. While Tesla is chasing the larger flagship projects, it simply doesn’t have the bandwidth to chase the mid-sized utility and commercial market. And that’s created a massive opportunity.
Some of the sharpest people who built Tesla’s storage business are now walking out the door to go compete with it directly. It’s a pattern with a long, lucrative history in American business. Both AMD (AMD) and Intel (INTC) – two companies essential to the modern AI economy – were founded by engineers who left Fairchild Semiconductor decades ago. Marc Benioff famously left Oracle (ORCL) to build customer relationship management pioneer Salesforce (CRM). The investors who spot defections like these early make out like bandits.
So, how big is the opportunity being pursued by the Tesla defectors?
Let’s look at some recent examples.
GE Vernova (GEV), which builds grid hardware for the buildout, is up more than 850% over the past two-plus years. Smaller, more speculative names like Oklo (OKLO) and Bloom Energy (BE) enjoyed even bigger runs on their way up.
Biggest Movers in Technology
Let’s get back to the tech sector.
As I do every week, I ran my customary screen of the biggest movers in the sector that were still within 10% of their 52-week highs last week. The idea is to look for solid, market-leading stocks that are getting stronger.
Here’s what I came up with:
We see some familiar names this week, including leading AI chipmaker Nvidia (NVDA). Unfortunately, we don’t see a lot of “green.” The only stock on the list rated as “Bullish” on my Green Zone Power Ratings is Dell Technologies (DELL).
This reinforces my view that the best opportunities in AI today aren’t in the companies most directly associated with it. The most obvious way to play the trend is by investing in the companies building out the electrical infrastructure.
That’s the opportunity the Tesla defector himself saw… and it’s the one I believe is the most likely to deliver us a 10X return.
What About Oil and Gas?
While the biggest opportunities are in building out the electrical infrastructure to power the wave of datacenters coming online, let’s not forget that good old-fashioned oil and gas are still a key part of the story. Long before electricity reaches a datacenter, someone needs to produce the fuel to generate it.
So, let’s take a quick look at the energy sector before I sign off.
I ran my customary screen of the sector’s biggest losers for the week that are still trading within 10% of their 52-week lows. The idea is to find beaten-down gems that look poised to recover.
We see a lot of green here. Seven out of the nine stocks on the list rate as “Bullish” on my Green Zone Power Ratings. As I’ve been saying for months, the Iran war is a distraction. Energy stocks were trending higher long before the bombs started dropping, and I expect that to continue long after this war is over and the news cycle has moved on.
Energy remains one of my favorite sectors, particularly for conservative investors. But if you’re looking for something a little higher octane, the electrification boom remains our best bet for a 10X, out-of-the-park homerun.
To good profits,
Adam O’Dell
Editor, What My System Says Today
