Gigawatts & Megadeals: The sheer scale of AI infrastructure

Silicon Valley Byte Size – The Allianz Technology Trust Podcast
Gigawatts & Megadeals: The sheer scale of AI infrastructure

 

 

 

 

Everyone is talking about AI, but what does it take to power this revolution? In Silicon Valley Bitesize, portfolio manager Mike Seidenberg and host Cherry Reynard, discuss the massive infrastructure build-out happening right now – a wave of investment so large it dwarfs major public works projects.

 

 

From multi-gigawatt data centres that consume the power of a small city to critical “plumbing” companies providing everything from cooling systems to backup power software, Mike explains why AI is about so much more than chips, and how Allianz Technology Trust team aims to identify the best-in-class companies poised to win in this new technology cycle.

 

Cherry : I’m Cherry Reynard, and with me today is Mike Seidenberg, Fund Manager on Allianz Technology Trust.

Mike, in our last conversation, you talked about the first and second derivatives of the AI theme, so beyond chip makers to companies like Amphenol, which make data centre connectors; what is the scale of this infrastructure build-out.

Mike: Great question – the scale is really hard to digest, but a gigawatt data centre is roughly the power needed for 750,000 to 1m homes.

Companies like Meta plan multiple gigawatt data centres costing $40bn to $45bn per gigawatt; that tells me as an investor, this is not a passing fad, it is a secular theme of which like we’ve seen previously in the cloud, software as a service, etc. It really encourages me to think about every single aspect of that data centre and how we can monetize it.

Power supply is a huge bottleneck. We have looked at various alternatives, but it’s cooling, it’s power – not just the chips you hear about on the front page of the FT, there are multiple facets.

The amount of money that is being spent is truly daunting to me, when someone throws out $250 billion – I was looking at the cost of the Elizabeth line as I was riding on it this morning because I absolutely love it – and it was £19bn. The amount companies are spending on data centres shows the enthusiasm around artificial intelligence is real and the spend is real.

Cherry: So, just one data centre is like a small city in terms of its energy needs.

Mike: Not even a small city, right? Most data centres are being built in areas with proximity to power – not Silicon Valley or San Francisco, but the middle of Texas, with access to oil and power. So, using 700,000 as our example, if you build a three-gigawatt data centre that’s 2.1m households; a tremendous build out.

Cherry: What does that look like on the ground? Are cranes and construction sites emerging?

Mike: Data centres are not being built in high density urban areas, but in places like West Texas, with access to cheaper power and energy sources and cheaper land.

Having had a really difficult time during and after COVID, places like San Francisco are now experiencing lease ups – buildings being leased back up. Big AI companies are taking large chunks of space in major metropolitan areas, and they’re hiring people.
There’s a trickle-down effect for those local economies as businesses build out teams, and there are hundreds or even thousands of employees if you think about a company like OpenAI.

It’s exciting, and you can really feel it, based upon job activity. So, I’m sure you could see cranes building data centres if you went to certain places, but it’s exciting. I mean, it really is.

Cherry: You mentioned other plumbing companies benefiting from heating and cooling?

Mike: Again, we focus on technology, so I wouldn’t buy a concrete company just because building data centres uses a lot of concrete; but the shells of these are enormous, it’s a scale.

It really is a scale business, but we’re looking at companies that go inside that data centre – backups, backup power supply software, right? A niche business that handles the backup power the centres need with software solutions. We’re trying to understand who the various companies and various beneficiaries are, whilst remembering that our focus, our job and our mantra is to focus on technology investing.

Cherry: With a huge trend like this, you obviously have lots of companies in the zone and benefiting from it. How do you exercise discernment in that environment? I mean, what separates a good business from a great business?

Mike: Great question. What separates a good business from a great business is ultimately, how do they execute? How good are the management running these particular businesses? In technology, the number one or two player takes disproportional share. I read a tidbit last week from Arthur Patterson at Excel talking about how companies and technology tend to dominate cycles. And it’s why we have always focused on the number one or two players in a given subsector.

Execution is a function of management, taking the solution and propagating the culture throughout, whether it’s sales, marketing, or customer service, all the things that really matter. We invest in what we think are excellent companies without being attracted to a number three or four player because, oh, well, we like this space. It’s an interesting space. Shouldn’t we own all four competitors in that space? And we really try to remember to be disciplined because over a cycle, the number one or two players will inevitably win.

Cherry: Is it ever possible to get as excited about a widget maker as it is about a sexy AI software company, or is it a case of having a balance in a portfolio because they’re kind of doing different things?

Mike: Ultimately it revolves around risk reward. I covered the video game sector earlier in my career and it was fun, right? Interesting IP, sports games, but, ultimately as a portfolio manager, my job is to empower the team to bring us good risk reward ideas. And yeah, is it more fun to go visit a company that’s making some incredible AI for healthcare? But that widget company whose total addressable market may have gone up by 4X, I mean, that’s really exciting to dive in, figure out the business, figure out where it’s going, where are they going to earn three years out. Not every business we invest in is sexy or cool, but ultimately, I can get just as excited about a business making connectors as I can somebody making special effects software for movies.

Cherry: How far into this infrastructure build-out cycle do you think we are?

Mike: It’s early days. It really is, and it’s not just me saying it. If you listen to the likes of Larry Ellison talking about Oracle, or the CEO of Microsoft, they are constrained, right? And they’ve talked about being constrained. And that constraint is just getting worse.

You can’t get the power and you can’t get these things spun up. They’re talking about 2026/ 2030 deliveries on a lot of this stuff, so are long lead times. Power is of a bottleneck and there’s all kinds of bottlenecks that really preclude people from getting and running quickly. And they’re moving as fast as they can, right? Companies are spending so much and they’re so aggressive about their spending, but it takes a while, it really does.

Cherry: How much of that is meeting demand today and how much of it is anticipating future demand?

Mike: A lot of the companies providing the services today, are constrained on the amount of service they can provide to their potential customers. Over time, that’ll even out because there’ll be more competition, there’ll be more things that will come online.

But today, it’s not that there isn’t demand, it’s can we supply that demand?

Cherry: Are there any infrastructure needs that are coming next that aren’t on investors’ radars yet? You mentioned some of those bottlenecks.

Mike: There’s just so much happening in technology; we haven’t even talked about the drones and stuff like that. Our most finite resource is our time, and I want to make sure we use it wisely. So, to me and the team, this is the biggest thing we’ve come across in a long time.

So I’m not really thinking about what else right now, because our plates are pretty full. But inevitably there will be, and that’s the great thing about the job and the great thing about the sector is you just go through these cycles where difficult problems are solved by these really innovative companies and that creates an opportunity.

Cherry: Absolutely. Okay, great. We will wrap up there. Thank you so much, Mike.

Mike: Great talking to you.

Cherry: And thank you to our listeners for tuning in. You can find out more about the Trust at our website, allianzetechnologytrust.com. Until next time.

 

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This is a marketing communication. Please refer to the key information document or KID before making any final investment decisions. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Past performance does not predict future returns. The mention of any particular security or strategy should not be considered as a recommendation. For further information on the Allianz Technology Trust www.allianztechnologytrust.com