Data centers are set for an AI-fueled boost, UBS says — naming 3 stocks to play the trend

Published Mon, Apr 8 20247:25 PM EDT

The data center sector is poised for fast growth in the years ahead, according to UBS. The investment bank predicts growth of between 15% and 20% for 2024 and 2025, and "healthy" double-digit growth in the following years. That's partly based on the projected growth of hyperscalers, which are doing much of the cloud computing for artificial intelligence applications. Data centers house vast amounts of computing power needed for AI workloads, and that need is set to grow as many tech companies are rapidly developing infrastructure for artificial intelligence. Large language models require a lot of data center capacity. "At this stage, the entire Data Centres-related value chain appears to be growing universally healthily for Capital Goods companies," UBS analysts wrote in an April 5 note. It expects large-scale electrification and secure power equipment to grow as power usage rises. "This space faces a fast growth outlook near-term that is supply- rather than demand-constrained and has potential for structural growth driven by data creation (IoT), [machine learning] and [generative] AI as well as data sovereignty considerations," the analysts said. The bank named three stocks to play the trend: U.S.-listed power management firm Eaton , French energy tech firm Schneider Electric and U.S. power tech firm Cummins . It says Eaton is the key U.S. play on data centers, with 14% exposure and "broad favourable trends" in electrification, while Cummins has "favourable backup power exposure" to data centers. UBS gave Eaton a price target of $330, representing marginal downside. It gave Cummins a price target of $321, or 9.7% potential upside. Schneider is the "most direct European play" on this growth theme, with 19% of sales in data centers and networking, and benefits from the entire value chain from electrification to building management and cooling, according to UBS. It gave the stock a price target of 250 euros ($270), or around 20% potential upside. — CNBC's Michael Bloom contributed to this report.