Listen to Nvidia. This Little-Known, Undervalued Company Could Be a Top Artificial Intelligence (AI) Stock Pick Now
One utility could supply power to a significant percentage of the world’s major data centers.
If there was any doubt about the strength of the AI boom in the stock market and the broader economy, Nvidia (NVDA 0.24%) just put those questions to rest.
For the first quarter of 2024, the AI chip titan just posted another blockbuster earnings report, including year-over-year revenue growth of 262% overall and 427% in the data center segment, where the AI revolution is taking place.
Those numbers weren’t a huge surprise to those that have been following the stock, but they were still better than expected as was the company’s guidance for the second quarter. It was enough to add roughly $200 billion to Nvidia’s market cap.
However, what really stoked excitement for the artificial intelligence revolution was commentary from Nvidia CEO Jensen Huang, indicating that growth in the AI market was still in its early stages and that demand was still soaring, outstripping supply.
For example, Nvidia noted that 40% of data center revenue was the result of AI inference, meaning that training, the other key component of creating generative AI models, likely made up a majority of data center revenue in the quarter. The company said that both training and inference were growing “significantly.”
That’s important, because inference is expected to eventually be a much larger part of data center demand than training since inference is the part that comes after training. If AI inference demand is still smaller than AI training demand currently, then that means the companies and organizations using generative AI are still in the very early stages of scaling generative AI demand.
Image source: Getty Images.
The AI power struggle
Running generative AI models consumes enormous amounts of power, and the issue has mostly gone overlooked thus far in the generative AI boom. Predictions about generative AI power consumption vary, but some say it will impact the electrical grid in ways not seen since the spread of central air conditioning in the 1960s. According to Goldman Sachs, data center power demand is expected to grow 160% by 2030.
If those estimates are accurate, the real winners in the AI-driven energy crunch are likely to include the power suppliers themselves, meaning utility companies like Dominion Energy (D 0.88%).
Nearly all of Dominion Energy’s profit comes from Virginia, where it enjoys a regulated monopoly in utilities. The company’s annual report says that it faces no competition for electric distribution service and “no such competition is currently permitted.”
That’s significant, because Virginia is a major market for data centers. In fact, Northern Virginia is the largest data center market in the world, and the state has roughly 35% of hyperscale data centers worldwide globally. These are the data centers that belong to some of Nvidia’s biggest cloud computing customers like Microsoft Azure, Amazon Web Services, and Alphabet‘s Google Cloud Services.
As those companies ramp up their AI data center operations, Dominion looks poised to benefit. On a recent earnings call, management noted, “Northern Virginia leads the world in data center markets. In recent years, this growth has accelerated in orders of magnitude.”
Why now is a great time to buy
Investors primarily own utility stocks for their dividends, as these recession-proof companies tend to be reliable income stocks.
However, most utility stocks have fallen over the last couple of years; rising interest rates have caused dividend investors to park their money in bonds instead, as treasuries are now paying more than 5%. You can see that weakness reflected in Dominion’s performance over the last three years.
The stock is down 33% over the last three years, even as the S&P 500 index has surged to new all-time highs.
Dominion currently offers a 5% dividend yield, making it appealing as an income stock. Investors who buy the stock now can capitalize on the recovery in the share price as interest rates are expected to fall later this year, and they should also benefit from growth in data center demand over the longer term in Dominion’s home market of Virginia.
Buying Dominion stock now could prove to be an excellent way to capitalize on the boom in generative AI.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool recommends Dominion Energy and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
