AI's Next Phase: Look at Data Center Stocks

I had to bust out the calculator after reading an incredible number.

Statista reports we create an estimated 328 million terabytes of data every day.

That’s the equivalent of texting a small picture of your grandkids or pets 656 million times … every day.

With the onset of artificial intelligence (AI), I don’t think that number is going down any time soon.

Think about it. Do you see yourself texting, browsing or streaming less in the coming years?

As much as I’d love to throw my phone in the ocean at times, I know that embracing innovative tech like AI is the smarter move.

Because as I mentioned last week, AI is this generation’s internet. It’s creating incredible early investing opportunities, and I expect that will continue as we find new ways to implement the tech.

Getting back to that incredible stat I led off with … data storage is critical for AI. Large language models can process terabytes of information in the blink of an eye — as long as the data is easy to access.

That’s where data centers come in…

Why Data Centers?

Data centers are digital filing cabinets. They securely house all of the world’s information and applications for easy access when needed.

I won’t get too technical here, but the modern data center is a complex network of physical assets (servers, routers, cooling units, power supply units, etc.) and virtual assets in the cloud.

Did you fill out a form on your doctor’s web portal? That information is now securely stored in a data center.

Looked up someone on Facebook? Yup, you guessed it. Facebook’s parent company, Meta, has a global network of data centers.

Brightlio estimates there are almost 11,000 data centers around the world as of December 2023.

And with the onset of AI, we’ll need faster and cheaper ways to move information around — which means more data centers.

Can you see the investing potential here?

Let’s see what Adam O’Dell Green Zone Power Ratings says.

ETF X-Ray Reveals Data Center Stock to Buy

I enlisted the help of Chief Research Analyst Matt Clark to help me find potential data center stocks to follow the AI mega trend.

As you may know, exchange-traded funds (ETFs) offer a chance to invest in a broad idea, sector or mega trend without having to be too picky about individual stocks.

But as Matt’s ETF x-rays have shown in the past, that’s sometimes not the best approach. While you get to buy a basket of stocks, some of those assets are going to be a drag on the broader fund’s performance.

To explore this idea, Matt ran the numbers on the iShares U.S. Digital Infrastructure and Real Estate ETF (NYSE: IDGT), an ETF that tracks American data center and digital infrastructure stocks.

Here’s how the fund’s average ratings look in Adam’s system:

Overall — 36 out of 100.
Momentum — 48.
Size — 32.
Volatility — 36.
Value — 29.
Quality — 56.
Growth — 56.

With a “Bearish” 36 out of 100 overall average rating, IDGT is expected to underperform the broader market over the next 12 months.

Digging into individual stocks within the fund shows us why.

Stocks like CCI (8), MRVL (6) and EXTR (6) are dragging IDGT down, while solid ratings on NTAP (84), ATEN (70), QCOM (70) and SMCI (62) means those stocks should offset the laggards.

I already touched on SMCI last week, so let’s look a little closer at IDGT’s highest-rated stock: NetApp Inc. (Nasdaq: NTAP)…

NTAP’s Green Zone Power Ratings in May 2024.

With a “Strong Bullish” 84 out of 100, NTAP is expected to 3X the broader market over the next 12 months.

NTAP provides data infrastructure, including software, to manage and store data. It partnered with Nvidia Corp. (Nasdaq: NVDA) to use flash storage to streamline massive amounts of data used in AI and deep learning applications. It’s a fancy way of saying NTAP provides data center power from what looks like nothing more than a large bookshelf.

Source: Nvidia.

The stock has gained 69% since May 2023, more than doubling the S&P 500’s 26% gain. That’s why NTAP boasts a 95 on Adam’s Momentum factor.

And this company is growing like a weed. In its latest earnings report, NTAP reported $313 million in net income for the quarter ending in January 2024. That’s a 381% increase year-over-year! It also grew revenues by 5% year over year to $1.6 billion. These are just two metrics contributing to NetApp’s impressive 84 Growth rating.

If you’re looking for a different way to follow the AI mega trend, data centers look promising. But as you can see from this ETF x-ray, it pays to get picky…

Of course, accessing, encrypting and delivering all of this information uses massive amounts of power. With the onset of AI, power consumption at data centers is expected to expand at a rapid pace.

Newmark, a commercial property consultancy, projects that data centers will consume twice as much power by 2030 because AI tech runs on complex (and power-hungry) graphics processing units.

It’s creating a “bottleneck” in the AI mega trend, but Adam has identified one company with a solution.

Click here to watch his brand-new AI Power Summit and get ready for phase two of the AI revolution.

Until next time,