AI Data Center Energy Needs: Is Natural Gas the Answer?

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Data Center Energy Demand is Insatiable

Cash-rich big tech juggernauts such as Meta Platforms (META) and Tesla (TSLA) are investing billions of dollars to build massive data centers to compete in the artificial intelligence (AI) revolution. Thus far, Nvidia (NVDA) has been a main beneficiary of the AI buildout, due to the extreme demand for its best-in-breed but expensive semiconductors. However, like any transformation trend, there are “pick and shovel” plays that will offer ample opportunities.

Data center energy demand is set to soar and grow by triple digits over the next few years (According to the International Energy Agency (IEA)). As if the added AI demand were not enough, crypto miners have been also putting pressure on an already overwhelmed electric grid. Recall that the Electricity Reliability Council of Texas (EROC) was forced to pay bitcoin miner Riot Platforms (RIOT) more than $30 million to limit its electricity use during a heat wave late last year.

Nuclear Stocks are on Fire

Nuclear stocks like Oklo (OKLO) and Constellation Energy (CEG) have been on fire since CEG signed a long-term deal with Microsoft (MSFT) to reopen “Three Mile Island” and provide nuclear power to train large language models.

Zacks Investment Research

Image Source: Zacks Investment Research

Natural Gas vs. Nuclear Energy

The nuclear industry is a clear winner of the AI boom, and there is no reason to think that the bull market will not continue. However, many of the nuclear stocks are trading off deals that will not generate revenue until long into the future and have many questions. Meanwhile, investors have wholly overlooked natural gas as an answer to AI’s energy needs. Below are three reasons natural gas may play a more significant role than most investors expect, including:

· Cost: Though nuclear energy is cheaper than natural gas, the upfront costs are very steep. On the other hand, natural gas energy has low start-up costs and is inexpensive compared to most forms of energy.

· Reputation: While data proves that nuclear power is among the safest forms of energy, many U.S. citizens have a dim view of it because of high-profile nuclear disasters like Fukushima and Chernobyl. In other words, many municipalities may want to avoid having nuclear energy plants in their communities.

· Regulation: Government approval is another hurdle for nuclear to jump. While many politicians are warming up to the idea of nuclear energy, gaining approval is a long and tedious process.

Tepper’s Natural Gas Take

David Tepper, the founder of Appaloosa Management, is a billionaire and one of the most successful investors of our time. Recently, he voiced concerns about nuclear energy’s ability to meet growing energy demands for AI. Because of its widespread availability and its ability to be deployed quickly, Tepper believes it is a more practical and readily available solution for powering data centers.

An Asymmetric Risk/Reward Opportunity

The United States Natural Gas Fund ETF (UNG) has collapsed from ~$140 to $13.94 today.

Zacks Investment Research

Image Source: Zacks Investment Research

If UNG were able to simply revert to the mean, investors would be rewarded handsomely. Meanwhile, production numbers have recently dropped, making for a bullish supply/demand balance.

Bottom Line

The AI boom has generated an insatiable need for data center power. Natural gas is an overlooked way to profit from the AI boom.

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