When it comes to the artificial intelligence (AI) revolution, one company stands out as the biggest beneficiary – Nvidia Corp. This technology giant has established itself as the leading provider of graphics processing units (GPUs) that accelerate machine learning and other processes critical for training AI models.
However, while Nvidia currently dominates the market, there are indications that other companies may emerge as significant players in the AI industry. According to analysts at Bank of America, chip makers like Advanced Micro Devices Inc. (AMD) and Intel Corp. will also benefit from this gold rush. Furthermore, they suggest that there are potential beneficiaries “where not expected,” meaning there is untapped potential in the market that may not be fully priced in.
Nvidia’s GPUs are particularly sought after for running large language models and powering generative AI. Hyperscalers and cloud service providers such as Amazon.com Inc., Microsoft Corp., and Alphabet’s Google require twice the power of traditional CPUs to meet the demands of AI applications. This significant power requirement not only consumes a lot of electricity but also generates substantial heat, even with lower power architecture designs like that of Arm Holdings Ltd., which Nvidia uses in its chips.
Bank of America predicts that AI will become “the largest data-center growth opportunity since the cloud.” As a result, companies involved in data-center infrastructure, including electrical and HVAC equipment manufacturers, are expected to benefit greatly from this trend. Eaton Corp., which generates 9% of its revenue from data centers and 5% from distributed IT, has been identified as a top pick by BofA analysts. On the other hand, Vertiv Corp., which derives about 70% of its revenue from data centers, has been given an underperform rating.
In conclusion, while Nvidia currently enjoys a dominant position in supplying GPUs for AI applications, the landscape is likely to change as new players enter the market. The potential for growth in the AI industry extends beyond the chip makers, with opportunities for companies involved in data-center infrastructure. This gold rush in AI presents an exciting prospect for investors looking to capitalize on this rapidly evolving technology trend.
The Growing Importance of Data Centers in HVAC Industry
Data centers have become a significant source of revenue for HVAC players, with Johnson Controls International PLC (JCI) leading the way. According to Bank of America (BofA), data centers contribute to 12% to 13% of JCI’s total revenue. On the other hand, Trane Technologies (TT) and Carrier (CARR) have comparatively lower exposure in this market.
Honeywell’s Building Management Systems business also benefits from the demand generated by data centers. BofA highlighted data centers as a key end market for Honeywell (HON).
Moreover, the incorporation of generative AI services by Microsoft is expected to fuel the growth of cloud services. This, in turn, will increase the demand for cloud services provided by companies like Adobe Inc. (ADBE) and Meta Platforms Inc. (META). These companies are actively integrating generative AI features into their products.
However, it is important to note that AI-driven services can be expensive to maintain. Traditionally, software companies have enjoyed high profit margins. However, the cost associated with running foundation models, the building blocks of AI, tends to be higher than that of traditional software-as-a-service platforms. As a result, companies developing foundation models face higher costs and lower margins. BofA estimates that AI companies typically see gross margins in the range of 50% to 60%, while SaaS companies enjoy margins between 60% and 80%.
Major players in the development and use of foundation models include Microsoft, Alphabet, Amazon, Nvidia, Meta, and IBM (International Business Machines Inc.). These companies either develop and train their own foundation models or invest in firms specializing in this area. Notable examples are Stability AI, Hugging Face, Anthropic, Cohere, Inflection AI, Runway, Databricks, and AI21 Labs.
The continuous growth of data centers and the increasing presence of AI in various industries create exciting opportunities for businesses involved in HVAC and related sectors.