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Wall Street has been fixated on artificial intelligence for over a year, with investor enthusiasm lifting tech stocks and chipmakers higher. But focus is increasingly turning to another group of companies that benefit from the AI wave: industrials-focused companies. The Club has two of them in our portfolio. Eaton and DuPont are both unconventional AI plays, as the data center market grows to meet the demands of the generative AI boom. Eaton has electrical products used in new and retrofitted data centers, which house the servers that deliver the intensive computing power needed for AI applications. DuPont’s semiconductor business stands to gain as orders for AI server chips grow. Top industry players like Jensen Huang, CEO of Club holding Nvidia , have said the frenzy is not letting up anytime soon — forecasting an influx of spending into data centers, as outdated equipment is replaced with AI-tailored products and new facilities are built entirely. “Generative AI has kicked off a whole new investment cycle to build the next $1 trillion of infrastructure of AI generation factories,” Huang, founder of the Club name and the leading AI chipmaker, said in February. “We believe these two trends will drive a doubling of the world’s data center infrastructure installed base in the next five years and will represent an annual market opportunity in the hundreds of billions.” So, what’s in it for our industrial-focused Club stocks? Wells Fargo Investment Institute last month described rising data center demand as having positive “trickle-down effects” on the industrial sector. “We all talk about artificial intelligence, and almost right away everybody’s attention turns to these [graphic processing unit] makers or the folks that are making the high-end computers that will be required to do a lot of the computations,” Sameer Samana, a senior global market strategist at WFII, told CNBC. “But what’s really interesting is the second and third impacts like industrials.” WFII wrote that spending from Big Tech firms into data centers, in particular, creates “meaningful downstream impacts” for industrial companies. The largest U.S. cloud infrastructure companies — Club names Amazon , Microsoft and Alphabet — are all playing a part in data center growth. Amazon Web Services is reportedly investing nearly $150 billion in data centers within the next 15 years to support AI efforts. Another recent media report said Microsoft and its partner OpenAI are considering a massive data center project that could cost up to $100 billion. Jim Cramer touched on this trend as well in his recent Sunday column . McKinsey analysts, meanwhile, forecast in January that U.S. data center electricity consumption would grow approximately 10% annually from 2023 to 2030 as more companies integrate AI. That goes right to the heart of electrical components and power management giant Eaton. It’s the most direct beneficiary of data center investments in our portfolio. And its stock price has reflected that — closing at a new all-time high of $330.51 per share Friday. Even with some weakness in recent days, the stock was still up about 30% year to date. ETN YTD mountain Eaton (ETN) year-to-date performance Data centers are one of Eaton’s biggest end markets, accounting for roughly 14% of companywide sales last year. Eaton sells electrical power management solutions to these facilities so they can operate more efficiently and safely. Its products include special circuit breakers, power management software and various electrical components. The growth of data centers targeted for AI workloads, in particular, is good for Eaton. AI data centers require higher power and power density than a more generalized computing facility, the company has said, which means they contain more electrical content. During the company’s most recent quarterly earnings call in February, Eaton’s then-finance chief said two of the company’s largest operating segments — Electrical Americas and Electrical Global — both benefited from strength in data centers. Management also delivered a bullish outlook for 2024 alongside the numbers, forecasting strong double-digit revenue growth for that end market. The Club argues that as more data centers are built, customers will have more need for Eaton’s offerings. In the long term, this will help fuel companywide sales growth. “The biggest amount of things that are ancillary to the data center are made by Eaton,” Jim Cramer said during Monday’s Morning Meeting. “Eaton is a part of this vast change in the grid that we’ve been talking about,” he said last week after Barclays upgraded the stock to its hold-equivalent rating from sell and boosted its price target to $300 per share from $250. Wall Street analysts have echoed the Club’s sentiments. On Friday, RBC Capital Markets upgraded Eaton shares to a buy-equivalent rating from hold, describing the stock as the “best large-cap way to play the current electrical supercycle.” RBC analysts argued that Eaton has the “best broad-based data center exposure” within their coverage, forecasting that the industrial name could likely surpass its own expectations for growth. “We believe Eaton’s estimate for a 10.8%, 5-year [compound annual growth rate] through 2028 for its data center & IT business could turn out to be conservative,” analysts wrote. Overall, Eaton’s been a huge win for us since we first invested late last year. Long-term we’re excited about its exposure to other megatrends like infrastructure spending and reindustrialization — efforts backed by the U.S. government’s approval of more than $1 trillion in spending bills. The Club made our first purchase of Eaton shares at $226.79 apiece on Nov. 15, with the stock climbing nearly 40% since then. Eaton hit an all-time on Friday. The Club has a buy-equivalent 1 rating on Eaton stock and a price target of $330 per share. DD YTD mountain DuPont De Nemours (DD) year-to-date performance DuPont also stands to gain from increased demand in data centers — albeit in a less direct way than Eaton. In particular, DuPont’s Electronics & Industrials segment, which accounts for around 44% of its sales , could get a boost. Within the division, DuPont has smaller businesses like Semiconductor Technologies and Interconnect Solutions that create materials used in the manufacturing process of chips, along with other high-performing computing solutions. They include offerings used in advanced chip packaging and coating. The construction of more data centers — and even retooling existing facilities for AI computing — means more need for chip-filled servers, stimulating demand for semiconductor manufacturing and DuPont’s products used in that process. We heard this recently firsthand from management. During a Barclays investor conference in February, CFO Lori Koch said DuPont’s data center and AI exposure will help boost the company’s electronics business. She believes DuPont’s Semiconductor Technologies segment is at the beginning of a multi-year upturn. The company projects industrywide shipments of silicon wafers to grow between 6% to 7% in 2024, Koch said, with DuPont’s semiconductor business outperforming that figure by roughly two to three percentage points due to its exposure to “data centers and AI and more advanced chips.” During the Feb. 21 event, Koch said DuPont’s semiconductor segment generated roughly $700 million in sales tied to data centers out of $2 billion overall. About $250 million is linked to AI, according to Koch. While that figure may be “small,” Koch said it is “growing a very nice clip for us.” DuPont’s companywide revenue was $12.1 billion in 2023. The Club is upbeat on any growth in DuPont’s Electronics & Industrials business because a turnaround for the stock was a big reason why we initiated our stake in August, at $78.41 per share. However, weakness in China and inventory destocking have weighed on the firm — prompting a disappointing fourth-quarter earnings preannouncement earlier this year that tanked the stock and led us to revise our price target lower, to $78 a share. In February, when DuPont issued its full quarterly results , management said the firm expects a broad-based recovery and continues to see demand stabilize for the Semiconductor Technologies and Interconnect Solutions businesses throughout 2024. The stock has worked its way back from its preannouncement plunge and traded at nearly $77 on Tuesday. While it remains slightly below where the Club initiated its position in August, multiple purchases on weakness put our cost basis at $74.71 per share. The Club has a 1 rating on the stock. 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Wall Street has been fixated on artificial intelligence for over a year, with investor enthusiasm lifting tech stocks and chipmakers higher. But focus is increasingly turning to another group of companies that benefit from the AI wave: industrials-focused companies. The Club has two of them in our portfolio.
