Here’s a number that will blow your mind: On average, ground is broken on a new hyperscale datacenter every two days.
Read that again.
America’s tech giants start construction on a new datacenter roughly every two days. And most of them will be completed within 18 months.
Building datacenters is quick and easy. Outfitting them with state-of-the-art Nvidia chips and server racks is also pain-free at this point.
The bottleneck is getting them powered up.
Electricity demand from new datacenters has massively outstripped the capacity of our grid.
It’s a major problem… and a major opportunity…
As I wrote yesterday, the best opportunities in AI aren’t in the flashy names most associated with it like OpenAI or Anthropic. They’re in the companies building out the electrical infrastructure the AI giants need to function.
This week, we’re going to do things a little differently. Rather than pick apart one the S&P 500’s major industrial sectors, we’re going to do a deep dive into the power infrastructure companies making the AI revolution possible. We’ll do an ETF X-ray on the Defiance AI & Power Infrastructure ETF (AIPO).
AIPO tracks U.S.-listed companies deriving at least 50% of their revenue from artificial intelligence hardware, data centers, and power infrastructure. Think of it as a one-stop shop for the picks and shovels of the AI economy.
The megatrend is real.
But let’s see how these companies stack up on my system…
A rising tide lifts all boats.
But one look at the pie chart above tells us we should tread carefully here. Of the ETF’s 80 stocks, only 14 rate as “Bullish,” meaning a score of 60 or higher out of 100. (For those new to my system, “Bullish” rated stocks outperform the S&P 500 Index by double on average over the following year.)
Another 14 rate as “Neutral,” meaning my system would expect them to perform more or less in line with the broader market. And the overwhelming majority, at 52, rate as “Bearish,” meaning my system would expect them to significantly underperform the market.
As a case in point, Forgent Power Solutions (FPS) – one of AIPO’s holdings – is literally one of the lowest-rated companies in the entire stock market. It rates a 0.6 out of 100!
This shows that while the underlying megatrend is real, we shouldn’t take a shotgun approach to investing in it. We should be selective.
Where Do AI Power Stocks Pick Up Points?
The Green Zone Power Rating system is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which comprises several sub-factors. (As we are generally looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
So, where do AIPO’s constituent stocks pick up the most points?
Growth!
The most “Bullish” factor is growth, with 36 of the stocks rating as “Bullish” on their growth factor.
That’s not at all surprising. Given that new datacenters sprout up like weeds, I would expect the infrastructure companies serving them to enjoy fantastic growth rates.
AIPO’s stocks also rate relatively well on quality and momentum, with factor ratings of 36 and 31, respectively.
Unfortunately, the stocks in this space tend to be choppy… and expensive. Only 11 rate as “Bullish” on volatility and eight on value.
Going Beyond the Obvious
As excited as I am about the AI electrification megatrend, the AIPO ETF looks like a lousy way to play it. The top-ten holdings collectively make up about 56 of the ETF. And seven out of those 10 rate as “Bearish” on my system.
So, if we’re going to profitably play this trend, we’ll need to look past the off-the-shelf ETF options.
As I wrote yesterday, industrial-scale battery storage is the obvious and immediate solution to the energy bottleneck.
To good profits,
Adam O’Dell
Editor, What My System Says Today
