The investment dashboard over the past three years has focused largely on the “Magnificent 7,” a group of the largest and most innovative technology companies in the United States at the peak of AI adoption and ecosystem.
OpenAI, a private company, is also widely known as a catalyst for the AI revolution, starting with the launch of ChatGPT in November 2022.
These companies also saw their stock prices and valuations increase significantly over the period.
This broad recognition can also lead to lower returns and higher risks. The Magnificent 7 now represent about 35% of the S&P 500.
Our investment team at Florida Trust favors many of these top-tier companies, but we believe a basket approach with a lower concentration can be very helpful to investors.
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We also recommend looking for other opportunities beyond cluttered transactions as AI proliferates in the economy.
Manufacturers and the race to build data centers
The AI investment theme has sparked renewed interest across several peripheral industry groups, including the industrial and utility sectors.
The race for turbines sold by companies such as GE Vernova, Siemens and Caterpillar to install in new data centers runs parallel to the race for the world’s most advanced, better-documented chips made by Taiwan Semiconductor.
While the tech space has dominated the headlines, S&P’s industrials sector has quietly been one of the best-performing groups, up about 18% for the year.
Utilities and the power needed to support AI growth
Another bottleneck will be the production of the energy necessary to operate these data centers.
Current estimates suggest that the United States faces an overall power gap of 44 gigawatts to meet AI’s projected growth trajectory through 2028.
For reference, 1 gigawatt is roughly enough to power 750,000 homes.
This makes the utility sector a direct beneficiary of widespread AI adoption. Utilities often conjure up an image of highly predictable but unspectacular operators with modest valuations. Historical price/earnings multiples are often around 15 times earnings.
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This arises from the regulated regime in which they operate. State comptrollers review and approve investments and rates and effectively cap profit margins.
Utilities operate as monopolies without monopoly power and their growth prospects have been historically limited.
Some utilities are now treated as proxies for AI demand. Many of them have seen their stocks appreciate and their valuations become more commonly associated with less defensive sectors.
Two examples are Constellation Energy and Dominion Energy.
Their coverage areas in Virginia include Loudoun County, often referred to as “Data Center Alley,” which is home to the largest concentration of data centers in the world, with more than 25 million square feet of floor space.
Other second-order opportunities related to AI adoption
There are several other second-tier investment opportunities that could benefit from AI. Data center REITs such as Equinix and Digital Realty own and operate data center infrastructure.
Further upstream on the adoption side, a number of companies are using AI technologies to gain a competitive advantage.
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In some cases, AI has led to higher quality products or services, such as Netflix’s improved content recommendations.
Meta has also improved ad targeting for customers on Facebook, Instagram and Threads.
In other cases, AI has allowed companies to increase profit margins through cost savings. Walmart applied AI to inventory management to reduce waste.
Florida Trust’s Perspectives on the AI Investment Landscape
The AI landscape is rapidly evolving and Florida Trust’s portfolio management team is prepared to adapt to a complex and rapidly expanding investment environment.
Legal, investment and tax information
This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should not rely on this information as a substitute for their own research or for obtaining specific legal or tax advice from their own attorney.
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About Florida Trust Wealth Management
Florida Trust Wealth Management is an independent, state-chartered trust company with more than $5 billion in assets under management.
It provides family office and wealth management services, including investment management, trust administration and financial advice to high net worth individuals, families, corporations, foundations and endowments.
The company focuses on absolute return and performance-driven wealth management services.
Originally established in 2001, the company operated for 25 years under its flagship name, The Sanibel Captiva Trust Company, including its divisions The Naples Trust Company and The Tampa Bay Trust Company.
Offices are located in Sanibel-Captiva, Fort Myers, Naples, Marco Island, Tampa, St. Petersburg, Belleair Bluffs and Tarpon Springs.
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