The $1 Trillion AI Infrastructure Shift Happening Right Now

Infrastructure Stocks Supporting AI Growth

Key Concepts:

• AI Infrastructure: The underlying systems and components enabling the development and deployment of Artificial Intelligence, beyond just chip manufacturers.
• Picks and Shovels: Companies providing essential tools and services that support a larger technological trend (in this case, AI).
• Small Modular Reactors (SMRs): Nuclear reactors that are smaller and designed for easier deployment, offering a potential solution to grid capacity issues.
• Price-to-Earnings (P/E) Ratio: A valuation metric comparing a company’s stock price to its earnings per share, used to assess relative value.
• Backlog: The total value of orders a company has received but not yet fulfilled, indicating future revenue potential.

1. Johnson Controls: From HVAC to AI Cooling

Johnson Controls (JCI) has undergone a strategic shift, divesting its traditional commercial and residential HVAC business (sold to Bosch for $5.6 billion) to focus entirely on cooling solutions for AI data centers. Despite losing revenue from the sale, the company now boasts a record-level backlog due to high demand from data center operators. Their expertise in cooling, built over decades in the HVAC sector, is now being applied to the specialized needs of AI infrastructure.

Financials & Valuation: While the stock has reached record highs, its P/E ratio is around 23, lower than competitors’ ratios of 30-35, suggesting potential for further growth. The speaker recommends a “dip buy” strategy.

Connection to AI: Data centers generate significant heat, requiring advanced cooling systems. Johnson Controls is positioning itself as a key provider of these systems.

2. Eaton: Power and Cooling Integration

Eaton (ETN) traditionally focused on commercial power distribution (transformers, breaker panels). Recently, they acquired Boyd Thermal, a cooling solutions provider, similar to Verdive. This acquisition allows Eaton to control both the power and cooling aspects of rack mount systems – essential components for data centers.

Performance & Outlook: The stock’s chart hasn’t reflected the positive impact of the Boyd Thermal acquisition yet, making it a potential “buy the dip” candidate. Analysts anticipate future growth due to the integration of the two businesses. Demand is expected to increase as data center operators leverage Eaton’s combined power and cooling capabilities.

Connection to AI: AI data centers require massive amounts of reliable power and efficient cooling, both areas where Eaton is expanding its presence.

3. New Scale (SMR): Addressing Grid Capacity

New Scale (SMR) is a developer of Small Modular Reactors (SMRs), designed to provide localized power solutions. The US power grid is facing capacity constraints, hindering AI development. SMRs offer a faster, more flexible alternative to traditional grid upgrades, allowing data centers to connect directly to a dedicated power source.

Technology & Contracts: New Scale has a proven technology and has secured a significant contract with the Tennessee Valley Authority (TVA) for up to 70 modular reactors. Despite being pre-revenue, this contract mitigates the risk associated with the nascent SMR sector.

Timeline & Volatility: The speaker estimates commercialization within 2 years, driven by the TVA deal and the urgent need to reinforce the grid. However, the stock is expected to remain volatile due to the early stage of both the AI and SMR industries.

Data Point: The power capacity of the grid needs to double by 2030.

4. Zyllem: Smart Water Management for Data Centers

Zyllem (XYL) provides smart metering systems for data center water usage. AI data centers consume massive amounts of water (1-2 million gallons per month), and accurate monitoring is crucial for cost control and efficient cooling. Zyllem’s systems monitor water quality, temperature, and usage down to the ounce level, enabling data center operators to optimize their water consumption and ensure accurate billing.

Business Model & Growth: Zyllem previously focused on residential smart meters but sold that division to concentrate on the higher-margin data center market. Their backlog is up 11% over the past quarter, indicating growing demand.

Investment Profile: The stock is described as stable and less volatile, offering a “sleep well at night” investment option.

5. Quant Services: The Skilled Labor Force

Quant Services (PWR) is a manpower provider specializing in highly skilled labor for connecting and maintaining complex infrastructure, including transformers, SMRs, and data center equipment. There is a significant shortage of qualified personnel capable of handling high-voltage power systems, creating strong demand for Quant Services’ expertise.

Market Position & Backlog: Quant Services is the leading provider of this specialized labor, with a growing backlog of work. The speaker highlights that AI, while automating some jobs, also creates demand for skilled trades like electricians.

Performance & Valuation: The stock tends to move with the broader sector but is less susceptible to downturns due to the essential nature of its services.

Logical Connections & Overall Thesis

The discussion centers around the idea that while chip stocks may be volatile, the underlying infrastructure supporting AI growth remains stable. The speaker advocates for investing in the “picks and shovels” of the AI revolution – the companies providing the essential tools, services, and resources that enable AI development. The five companies discussed represent different facets of this infrastructure: cooling, power, localized energy generation, water management, and skilled labor.

Notable Quote: “Every time the market fluctuates because of AI, it’s because AI is still developing… the underlying technologies that support them tend to stay stable.” – Jeffrey Neil Johnson

Conclusion:

The video presents a compelling case for diversifying AI investments beyond chip manufacturers and focusing on the often-overlooked infrastructure companies that are critical to the long-term success of AI. The selected stocks offer varying risk profiles and growth potential, providing investors with a range of options to capitalize on the ongoing AI buildout. The emphasis on companies with strong backlogs, strategic acquisitions, and unique market positions suggests a focus on sustainable growth and long-term value creation.