One of the biggest themes fueling the capital markets right now is artificial intelligence (AI). What investors may not realize, however, is that there are many components of AI -- some of which sit quietly in the background.
One of the most important narratives emerging in the AI revolution is data centers. While megacap tech behemoths such as Nvidia have benefited greatly from surging demand for data center services, savvy investors understand that there are ample opportunities out there.
In particular, nuclear energy companies might be worth a look as data centers continue to witness outsize growth.
Let's explore how nuclear energy is playing a role in the development of data centers, and why I see Constellation Energy (CEG 25.16%) as a lucrative opportunity right now.
How can nuclear energy play a role in data centers?
Data centers are facilities that house IT infrastructure such as server racks that essentially act as storage clusters for semiconductor chips. These chips are constantly processing loads of information and have a tendency to experience abnormal heat levels.
The combination of constant data processing and thermodynamics causes data centers to consume a good deal of energy.
Today, data centers account for 2% of total electricity use in the U.S., according to the Department of Energy.
While it's still early, some companies are beginning to seriously consider nuclear energy as an alternative to solar and wind services to help augment data center energy infrastructure. Nuclear energy is considered to be more reliable against power outages when compared to other forms of energy.
Moreover, nuclear is also a form of clean energy -- making it even more compelling for businesses committed to sustainability.
Some interesting conversations at Constellation Energy?
Back in April, Constellation Energy CEO Joe Dominguez briefly spoke with Bloomberg about regarding the company's growth roadmap and how AI is playing a big role.
When asked which big tech companies Constellation is currently talking to about its nuclear energy capabilities, Dominguez replied, "all of them."
Although that's encouraging to hear, perhaps it's not too surprising.
Just last year, Constellation inked a deal with "Magnificent Seven" member and AI darling Microsoft. Per the terms of the deal, Microsoft will be using Constellation's services at one of its data centers in Virginia.
Image source: Getty Images.
What does the long term hold?
Outside of Microsoft's deal with Constellation, Amazon purchased a nuclear-powered data center from Talen Energy earlier this year.
I see these moves by big tech as a good proxy for what's to come, and am bullish about the future of nuclear energy consumption.
With that said, I have a suspicion that the energy sector more broadly may experience some abnormal volatility over the next few months. Some of this will likely be driven by the upcoming presidential election and how it could impact energy policy.
While this can add an extra layer of uncertainty to investing, it's far more important to keep the long-term picture in focus.
Considering data is increasingly being used by corporations of all sizes to make more informed and efficient decisions, I don't see investments in breakthrough technologies such as AI slowing down anytime soon. For that reason, I think investors should keep a keen eye on AI-adjacent opportunities, particularly in the energy sector as these could prove to be lucrative over the long run.
Right now, Constellation Energy trades at a price-to-earnings (P/E) ratio of just 23.2. By contrast, the P/E for the S&P 500 is meaningfully higher at 27.5.
I think investors are underappreciating the potential nuclear energy could have on the AI landscape. Given Constellation's discount relative to the broader market, coupled with some initial signs of demand from the world's largest AI players, I think the stock looks like a great buy right now for long-term investors.
