National Post

Investors cast wider net for AI winners beyond pure tech

While the reaction to Nvidia Corp.’s results showed that Wall Street remains laser-focused on artificial intelligen­ce, investors are increasing­ly looking beyond the usual suspects to find the next AI winners.

There is growing recognitio­n that expanding AI infrastruc­ture won’t simply benefit chipmakers such as Nvidia or server companies like Super Micro Computers Inc., but will have implicatio­ns for a variety of sectors.

Makers of electrical components such as Amphenol Corp. have rallied, while real estate investment trusts that focus on data centres are expected to experience increasing demand as AI usage grows and more workloads shift to the cloud. Notably, the energy required to run AI is expected to result in upside for utilities and other companies connected to the power grid.

“I never believed that it would affect electricit­y prices this much, but people are talking multi-gigawatt expansions here,” Brian Frank, president of Frank Capital Partners LLC, said. “It’s bleeding into my energy and utility stocks.”

AI is “the growth engine right now of everything,” including beyond tech.

According to strategist­s at Goldman Sachs Group Inc., hedge funds have increased their exposure to a broader set of potential AI winners, including in the infrastruc­ture and utility sub-industries, while trimming exposure to the Magnificen­t Seven.

Companies that have jumped in popularity include Littelfuse Inc., which makes circuit-protection devices, AES Corp., an electric utility, and technology supply-chain services company TD Synnex Corp.

“Money’s not leaving the market. It’s just being reshuffled,” said Louis Navellier, chief investment officer at Navellier & Associates Inc., noting strength in electricit­y grid and cloud-related companies.

A Goldman basket related to growing demand for power has soared 39 per cent this year, while one for Ai-exposed hardware stocks is up 26 per cent. The Bloomberg Magnificen­t 7 Total Return Index has gained 24 per cent and the Nasdaq 100 index has risen 11 per cent.

Bank of America Corp. said the AI trade is “not just about Nvidia anymore,” and it predicts a “virtuous cycle” related to AI investment­s.

“AI benefits are broadening out to power, commoditie­s and utilities,” it said in a note. “Fundamenta­ls are broadening out and so should the market.”

Among arguably lower-profile AI stocks, Amphenol has risen 38 per cent this year, hitting records and splitting its stock. AES has risen nearly 30 per cent off an April low, while TD Synnex is on track for its biggest monthly gain since November 2022. Power producer Vistra Corp. is up 150 per cent as investors expect AI will fuel demand for electricit­y. AXT Inc., a maker of compound semiconduc­tor substrates, is up 35 per cent this year following a pair of post-earning rallies.

“There’s a lot that’s required for AI, and if you’re specializi­ng in one of the components, then being niche can be impactful,” Pedro Palandrani, director of thematic research at Global X Management Co. LLC, said.

Gains have been less pronounced in data centre REITS. Digital Realty Trust Inc. is up 5.7 per cent this year while Equinix Inc. is down 4.7 per cent.

AI has been a central driver of equity gains, with Big Tech leading the charge. Nvidia in particular is seen as the poster child for the technology, up more than 90 per cent this year. The company gave its latest blowout forecast on Wednesday, a sign of enduring demand.

Other megacap AI plays — notably Meta Platforms Inc., Microsoft Corp. and Alphabet Inc. — have also posted double-digit returns this year. However, the tailwind for those stocks is widely known, which could suggest greater upside potential among smaller or more obscure names.

“Megacaps are the starting point for AI, but if you’re just in them you’re missing the real growth opportunit­y,” Rene Reyna, head of thematic ETF strategy for Invesco Ltd., said. “When you think of AI implementa­tion, there’s a meaningful segment of the market beyond the megacaps playing a major role and generating strong revenue. It cuts across arguably every industry.”