Data centres, as the critical infrastructure behind the digital economy, are set to play a key role in delivering new AI tools to consumers and enterprises, says Ben Forster, Portfolio Manager, Global Listed Real Assets at Schroders.
Data Centres: The modern-day shovels in the AI Gold Rush
The mass adoption of generative Artificial Intelligence (AI) (a type of AI that is capable of creating new data or content, rather than simply analysing, or processing existing data), marked by the run-away success of ChatGPT since November 2022, has sparked interest akin to the Californian Gold Rush. Investment markets have jumped back on the bandwagon to Silicon Valley, rewarding pioneering firms like NVidia, Google, and Microsoft, that have gained first mover advantage through extensive research and development efforts. Investors are understandably now looking for the next group of beneficiaries, whilst seeking to avoid high risk or even loss-making companies.
We believe that the answer is hiding in plain sight. NVidia’s first quarter 2024 earnings call was a watershed moment for the AI supply chain, highlighting the incredible recent growth in demand for NVidia’s hardware and leading analysts to upgrade their full year revenue expectations by approximately 40% (source: Refinitiv).
In explaining their upgraded outlook, the company mentioned ‘data centres’ no less than 56 times during their earnings call for investors on 24th May 2023. It is clear that their advanced Graphics Processing Units (GPUs) (GPUs accelerate the processing of large amounts of data, needed for training and applying AI models) entirely depend upon high-performance, secure, and stable data centre environments.
Translating the growth potential into numbers
The potential size of the opportunity remains subject to fierce debate, but forecasters estimate that total demand for data centres, as defined by power consumption, could hit 35 gigawatts (GW) by 2030 in the US market alone, up from 17 GW in 2022. A GW is a unit of power equal to one billion watts, often used to describe the output of large-scale power plants or other energy systems.
The US currently constitutes about 40% of the data centre global market. Industry analysts estimate that the future power consumption related to AI deployments could increase from approximately 1GW in 2023 to 7GW by 2026, representing a $12 billion revenue opportunity for data centre operators and 15-20% growth versus existing total data centre capacity.
Equinix owns a portfolio of 248 multi-tenant data centres across 32 countries, that host 10,000+ companies, with 450,000+ inter-connections between them. Their services have grown beyond offering physical space, power, cooling, and connectivity to increasingly focus on network services, growing their competitive advantages. In 2023, Equinix identified a $21 billion addressable market for data centres services to support AI by 2026, based on their current operations and capacity. Whilst they will likely only take a percentage share of this opportunity, it could significantly grow their current revenue of around $8 billion per annum (source: company, June 2023).
As data centres begin to host more high-power GPUs to support AI, the draw on our electrical grids will only become more acute. Some utility providers are already setting quotas that limit the construction of new facilities, making existing facilities more valuable. Singapore is case-in-point, with new data centre power quotas tightly controlled by the government and disproportionately awarded to incumbents such as SingTel, who can help to arrange novel solutions to renewable power requirements.
The AI supply chain must work hard to derive more efficiency from existing resources. Innovations around liquid cooling and optical networking technologies are advancements set to reduce the energy consumption needed to run high performance chips. What’s more, data centre operators and occupiers are working intently to add new large scale renewable energy supplies onto the grid.
AI adds to the unprecedented demand for data centres
Data centres, as the critical infrastructure behind the digital economy, are set to play a key role in delivering new AI tools to consumers and businesses.
As with any new technology, the ultimate size of the AI market opportunity remains open for debate. Data centre operators will need to carefully manage environmental and regulatory concerns. We believe that companies with long track records of innovation should see their revenue growth augmented by this new wave of applications.
Following an extensive deep-dive into key Asian cities, we believe that the region presents some of the most exciting growth opportunities. Moreover, ‘first movers’ with the most well-established digital infrastructure networks are best placed to capture the explosive demand to come.
Further reading : How AI is set to accelerate demand for data centres, by Ben Forster, Portfolio Manager, Global Listed Real Assets at Schroders.
