Investors who missed the AI rally over the past year are wondering where they can put money to work that will benefit from the growth and adoption of AI without putting hard-earned savings at risk of a major correction in the event the hype is overblown.
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AI bets beyond tech stocks
NVIDIA (NASDAQ: NVDA) is up 175% in the past year at the time of writing and trades at 10 times its value in the fall of 2022. With a current 12-month trailing price-to-earnings (P/E) ratio of 75.5, the market is betting that sales and profit growth will continue to be very strong in the coming years. That might turn out to be the case, and a positive second-quarter (Q2) 2024 earnings report from NVIDIA on August 28 could potentially send the stock to a new high.
However, investors who remember the dot-com boom 25 years ago might be justified in taking a cautious approach right now with AI stocks in the tech sector. NVIDIA’s chips are in hot demand, and the company has a strong lead in that segment of the AI market. However, the customers who are scrambling to buy NVIDIA chips to build their AI capabilities will eventually have to show that the investments are delivering meaningful benefits to the bottom line. As with the dot-com market crash and the plunge that followed the Y2K spending frenzy, there could be a tech hangover on the way after the initial AI party.
One alternative way for investors to get exposure to AI is through companies that should benefit from AI expansion but are not actually in the tech space.
Enbridge
Enbridge (TSX: ENB) is an energy infrastructure giant in Canada and the United States with a current market capitalization on the TSX of about $116 billion. The company’s pipeline transmission networks move 30% of the oil produced in the two countries and about a fifth of the natural gas used in the United States. Enbridge’s acquisition of three American natural gas utilities in the United States for US$14 billion this year makes it the largest natural gas utility operator in North America.
AI data centres consume significant amounts of electricity. Many firms that are planning to build AI data centres are concerned that existing power infrastructure might not be able to cope with the surge in electricity demand. This is already a concern due to the anticipated demand for electric vehicles, and AI compounds the challenges. Upgrading and expanding power grids is expensive, and the process can take more than a decade due to the extensive permitting processes. As a result, firms are looking to build on-site power generation for AI data centres. Gas-fired facilities are viewed as the most viable option in many cases.
Enbridge recently highlighted the opportunity. There are roughly 300 AI data centres currently planned or under construction in the United States.
Ideally, AI power would come from renewable energy. In some cases, this will be possible, or at least part of the power could come from green sources, and the gas-fired facilities would provide the rest. Enbridge can deliver wind and solar power and supply natural gas. In 2022, the company purchased Tri-Global, the third-largest wind and solar developer in the United States.
Enbridge trades near $53.70 at the time of writing compared to $59 at one point in 2022. The company is working on a $24 billion secured capital program that will help grow distributable cash flow by 3% per year through 2026 and by 5% starting in 2027. This should support steady dividend growth in the same range. Enbridge has increased its distribution each of the past 29 years. Investors can currently get a 6.8% dividend yield from ENB stock.
The potential AI benefits are probably not built into the share price at this point.
The bottom line on AI opportunities
Tech stocks focused on AI deserve to be part of your overall portfolio mix, but there are other AI opportunities to consider that trade at more reasonable valuations right now.
