Investing in the Sustainable Future

Archive edition · Market data and company circumstances reflect 9 November 2024, when this newsletter was sent.

Green Data Centers: Investing in Sustainability

Imagine a world where every swipe, click, and stream contributes to a rapidly growing energy demand, one that’s expected to soar by 165% for data centers alone by 2030.

This demand is fueled by the relentless rise of Artificial Intelligence (AI), cloud computing, and digital transformation reshaping industries worldwide. Yet, while our digital lives thrive, the environmental toll mounts—leaving tech giants racing against time to transform the way they power their operations.

After being flat for 2015-19, data center power demand accelerated in 2021-23.

For investors, this isn’t just a trend; it’s an urgent, unprecedented opportunity. The race toward sustainable power in tech opens the door to investments in clean energy innovations: renewables, advanced nuclear, battery storage, and carbon capture, to name a few.

Those who recognize this shift early have a chance to be part of a green revolution that promises to redefine not only technology but also the future of investing. The question is, are you ready to seize it?

The Sustainability Challenge

Data centers have historically relied on fossil fuels, particularly natural gas, for uninterrupted power. But as the world pushes for more sustainable solutions, major tech companies—often referred to as "hyperscalers"—are seeking out low-carbon power sources.

While renewables like solar and wind are great options, their intermittent nature makes consistent energy challenging.

That’s where new energy solutions like nuclear power, battery storage, and carbon capture come in.

Big Tech’s Low-Carbon Commitment

Despite the Green Reliability Premium, Big Tech continues to prioritize low-carbon power, underscoring a steadfast commitment to sustainability. These companies are motivated not only by the potential for high corporate returns but also by reputational benefits and alignment with global environmental goals.

Goldman Sachs believes that this premium has a modest impact—around 5% or less on earnings before interest, taxes, depreciation, and amortization (EBITDA)—and is unlikely to deter continued investments in clean energy sources.

Nuclear Energy's Comeback

Nuclear power, particularly small modular reactors (SMRs), is experiencing renewed interest. SMRs offer a flexible, lower-cost nuclear option that is better suited to meet the needs of data centers and other industries with continuous power requirements.

As momentum builds for nuclear capacity expansion, Goldman Sachs expects a greater focus on geographical exposure to Uranium.

With regulatory advancements and increased government support for nuclear energy, especially in the U.S., nuclear power may play a larger role in the energy mix within the next five years. Reducing the costs of SMRs and scaling up nuclear power will be essential to ensuring its long-term competitiveness.

Carbon Capture and Removal

Besides sourcing green energy, Big Tech is also investing in carbon capture and removal technologies to offset their emissions. These technologies allow data centers and other heavy power users to continue operating without a direct reliance on renewable energy sources. Companies that manufacture and deploy carbon capture solutions are likely to see significant growth as Big Tech continues its all-in approach to low-carbon operations.

Natural Gas as a Transitional Solution

Despite the push for renewable and low-carbon solutions, natural gas is expected to account for approximately 60% of data center power demand, with most of it coming from combined cycle plants.

While natural gas is not a clean energy source, its abundance, affordability, and reliability make it a practical choice, at least in the short term.

The goal for tech companies and energy providers alike is to use natural gas in ways that minimize environmental impact, potentially through innovations in gas peaker plants or carbon capture.

Green Tech Sector: Stocks to Consider

For investors, the shift to sustainable data center power offers a promising landscape. Here are some key sectors and stocks to consider, along with price targets from Goldman Sachs:

Utilities & Energy

Companies providing green power solutions, especially those expanding battery storage for renewables, are essential players in this transition. Here are some top picks:

• NextEra Energy (NYSE: NEE): A renewable energy leader aiming for 47 GW of renewable capacity by 2027. Price Target: $92
• Sempra Energy (NYSE: SRE): Its subsidiary, Oncor, is positioned to benefit from Texas’s data center growth. Price Target: $96

Solar & Wind Power

Renewables will be critical as data centers expand. Companies that specialize in solar panels and wind turbines are well-positioned to capture this demand. Here are some top picks:

• First Solar (NASDAQ: FSLR): Set to add 15 GW by 2026, supported by U.S. manufacturing credits. Price Target: $279
• Fluence Energy (NASDAQ: FLNC): This global battery storage integrator has a $20 billion pipeline, with data centers representing approximately 40% of its US projects. Price Target: $26

Nuclear Energy

As a stable, 24/7 clean energy source, nuclear power is seeing a resurgence, with SMRs leading the way. Nuclear offers a compelling option to meet data centers’ constant energy requirements. Here is a top pick:

• Cameco Corporation (NYSE: CCJ): With a recent acquisition of Westinghouse, Cameco is well-positioned across the nuclear fuel cycle. Price Target: $61

Carbon Capture

Carbon capture will be crucial for data centers aiming to offset emissions. Companies specializing in these technologies are set to see significant growth.

Natural Gas

Natural gas will continue playing a major role, especially in regions where renewable infrastructure isn’t fully in place. It’s a key area for those seeking near-term investment returns. Here are some top picks:

• Kinder Morgan (NYSE: KMI): One of the largest U.S. natural gas transporters, with pipelines supporting Texas’s power needs. Price Target: $26ularly strong growth in emerging markets. Over the next five years, air travel is expected to grow by 5% annually, before decelerating to a still-solid 3% per year by 2040. Price Target: $26
• Williams Co. (NYSE: WMB): Serving 33% of US natural gas demand, Williams is strategically located to meet data center power demands, particularly in the Southeast and PJM markets. While challenges remain, Williams’ scale and connectivity offer a steady income potential. Price Target: $45

Archive note

This article preserves the analysis in our weekly newsletter sent 9 November 2024. Market prices, forecasts and company circumstances reflect the time of publication and may have changed.

This material is general information, not personal financial advice or a recommendation to trade. Investing and trading involve risk, including loss of capital.