Drawing inspiration from the California Gold Rush, where the true winners were the companies supplying essential tools and services to prospectors, this strategy focuses on investing in the enablers fueling the AI revolution rather than directly betting on the pioneers at the forefront. As AI continues to disrupt industries and reshape the technological space as we know it, the demand for the critical infrastructure, hardware, and services that power this transformative technology has exploded. From semiconductor manufacturers like NVIDIA (NASDAQ: NVDA) and AMD (NASDAQ: AMD) crafting the high-performance chips that train and run AI models to cloud computing giants providing the computational muscle and scalability for AI workloads, these enablers have become indispensable cogs in the AI machine.
Moreover, the labour-intensive process of data labelling and annotation, crucial for training AI algorithms, has given rise to a thriving ecosystem of specialised firms.
We’ve previously discussed investing in energy for innovation as well as the risks of under investment in the space with the immense energy demands of AI having thrust energy companies into the spotlight, positioning them as potential beneficiaries of this computational arms race.
Beyond the global giants, who are some of the AI picks and shovels plays on the ASX?
SCEE Group and the AI Electrification
SCEE Group (ASX: SXE) is an electrical contracting company diversified across the resources, commercial, and infrastructure markets in Australia.
While not directly involved in AI, SCEE Group is well-positioned to benefit from the growing demand for data centres driven by the AI revolution. The group primarily provides electrical contracting services, with a focus on expanding its core competencies and adding complementary capabilities through organic growth and acquisitions. The company has increasing exposure to service and maintenance work, with recurring revenues now accounting for over 40% of its activities. In the last 12 months, SCEE Group’s share price has climbed close to 150%, riding a wave of AI momentum.
The global data centre market is estimated to grow at a compound annual growth rate of 9.6% during the period 2023-2030, driven by the increasing adoption of cloud computing and AI technologies.
Data centres are electrically dense, with electrical work comprising the largest component of construction costs. SCEE Group has a strong presence in the data centre market, having announced thirteen data centre awards totalling over $120 million in the last four years. The company is currently working on data centres for major cloud providers in Sydney and supplying switchboards to data centres in Auckland and Victoria.
Looking ahead, SCEE Group is tendering or positioning for over $500 million worth of work to be awarded in the next two years for extensions at existing or new data centre builds across twelve separate projects.
Following the acquisition of MDE Group, SCEE Group has upgraded its FY25 EBITDA guidance to at least $53 million, up from the previous guidance of at least $48 million. The company expects this growth to be sustainable, with further earnings growth anticipated in FY26 and beyond.
IPD Group & Its Data Centre Potential
IPD Group Limited (ASX: IPG) is a leading provider of electrical solutions focused on energy management and automation.
The company enhances electrical infrastructure through advanced energy efficiency and secure connectivity solutions, ensuring safety and wellbeing. With a commitment to innovation, IPD is pivotal in the electrification and decarbonisation of the economy.
IPD operates two core divisions:
Products Division:
Distributes electrical infrastructure products from global brands like ABB and Emerson. The division’s offerings include power distribution, industrial control, automation, power monitoring, and hazardous area equipment. It also provides custom assembly, engineering design, technical support, and regulatory management.
Services Division:
Offers installation, commissioning, calibration, testing, maintenance, EV solutions, and refurbishment services.
While data centres currently make up a small portion of IPD Group’s end customer markets, the company recognises the potential for growth in this sector. The data centre market is experiencing strong momentum, driven by the increasing demand for cloud computing, digital transformation, and the need for secure and reliable data storage and processing.
IPD Group has demonstrated its capabilities in the data centre space by successfully completing projects such as supplying low-voltage switchgear for the Stack data centre and designing and constructing the high-voltage infrastructure for the Cloud Carrier data centre.
The global data centre market is expanding rapidly, driven by increasing demand for cloud computing, AI, and digital services. Investment in new facilities and the adoption of advanced technologies are key trends. Sustainability is also a critical focus, with data centres prioritising energy-efficient practices.
For the financial year ending June 30, 2024, IPD Group has provided the following earnings guidance range, excluding merger and acquisition costs:
Operating Earnings: $39.0 million – $39.5 million
Earnings Before Interest & Tax: $33.5 million – $34.0 million
This guidance reflects the company’s strong performance and the positive impact of its recent acquisitions, including EX Engineering and CMI Operations, which have strengthened its electric vehicle infrastructure team and expanded its customer reach.
The TAMIM Takeaway
While the AI revolution promises transformative breakthroughs across industries, identifying which specific AI applications and companies will emerge as winners remains challenging.
The “picks and shovels” investment strategy offers a compelling way to capitalise on the broader AI boom by investing in the companies providing critical infrastructure, tools, and services enabling AI development and deployment. From semiconductor manufacturers and cloud providers to data labelling firms and electrical services and maintenance companies, these enablers are well-positioned to benefit from AI’s proliferation regardless of which AI innovators ultimately lead the charge.
For investors seeking exposure to AI’s vast potential while mitigating stock-specific risks, a basket of carefully selected “picks and shovels” plays could prove a prudent approach to navigating this rapidly evolving technological frontier.
