With a jump of +151.5% in 2024, leading graphics card manufacturer Nvidia has clearly been the winning bet of the year, given that the company seems unavoidable if one is to capitalise on the AI craze.
But if the development of AI seems inevitable, investors might be better off asking themselves what the next Nvidia will be, rather than trying to jump on the bandwagon.
The answer to this question could well be electricity generation. Indeed, if Mark Zuckerberg is to be believed, the biggest bottleneck holding back the development of AI is not the availability of high-capacity graphics cards, but rather the capacity limits in the production of electricity to power AI data centres.
And while many players have entered the race to produce graphics cards so that they are no longer dependent on a single supplier, capacity limits in energy production remain. These constraints are all the more important given that the industry is highly regulated, which inevitably slows down the start of investment projects.
Microsoft champions renewable energies
Against this backdrop, Microsoft has further increased its interest in clean energy. Firstly, by admitting that its CO2 emissions had increased by 30% as a result of AI. To solve this problem, the Redmond giant has announced a colossal 10.5 GW contract with Brookfield, providing for investments of more than USD 10 billion to build and develop renewable energy production capacity between 2026 and 2030 located close to data centres. To this end, Brookfield will be using solar power, onshore wind generation and battery storage. This news underlined the scale of the increase in demand for electricity that the Artificial Intelligence revolution will bring. This will naturally benefit all players in the renewable energies sector.
The clean energy sector begins to react
This increased demand has led to a clear rebound in the sector, particularly in solar equipment and renewable energy developers. In May, the sector recorded an encouraging performance – after many difficult months – of almost double that of the market as a whole. In fact, the Wilderhill NEX index climbed by +9.75% over the period, while the MSCI World index only gained +4.5%.
This describes the market trend over the past month, but the reality is that fundamentals are improving. In particular, the figures that power plant equipment manufacturers and energy project developers published for the 1st quarter were, on the whole, pretty good. The bottom of the macroeconomic cycle seems to be behind us. Supply chain problems appear to have been resolved and inventories are normalising. What’s more, almost all the companies in the sector have reported a positive impact of AI on their business development, a trend that is certain to continue.
Relocation policy benefits US players
The generally positive trend is being supported in the USA by the issue of relocation, which remains a factor in improving demand, prices and margins. It has to be said that the Americans are now applying heavy customs duties on Chinese imports in order to protect domestic jobs. Photovoltaic panels are taxed at 50%, electric vehicles at 100% and lithium-ion batteries at 25%.
The Biden administration increased these taxes in anticipation of the November elections, which reduces the uncertainty that a Trump victory would change the United States’ firm stance on trade with China.
No risk of supply disruption
One of the critical points is that renewable energy developers should have enough photovoltaic panels and batteries to carry out their projects. From what they tell us, this is not a risk at present, unlike what may have happened in the past when trade policy towards China suddenly changed. Furthermore, making imports more expensive as a result of increased tariffs directly benefits domestic solar panel producers, as was the case with First Solar, which jumped by +58%. The company is one of the few US manufacturers, and by far the largest.
Modernisation of the electricity grid
Another recent development was the publication of rules by the Federal Energy Regulatory Commission (FERC) which, for the first time in several decades, intends to carry out a major overhaul of the electricity distribution network. The new rules are designed to modernise the grid to make it capable of meeting climate targets, reduce system instability due to the coal phase-out, improve reliability (1 in 7 American households have to rely on backup generators), and force utilities to speed up their modernisation. Indeed, the technology sector needs electricity immediately and cannot wait for electricity producers to get moving.
M&A fever returns
To meet this growing appetite, the sector is experiencing a new wave of mergers and acquisitions. Brookfield has made a bid for a controlling stake in Neoen. As was the case earlier this year with the takeover of Encavis, the price offered represented a premium of 27% over the share price, and even 40% over the average price over 3 months (weighted by volume). These premiums also reflect the current low valuations of listed companies, and we could finally see a re-rating. This could be particularly the case in Europe, where power generators have underperformed the broader market by around 25% since 2021, while renewable energy developers have suffered from a valuation differential of up to 40%. Despite the recent rise, these companies are still far from their highs, and some are even trading at a discount to their installed operating capacity base.