“I’M very bullish on the outlook for data centres,” says Pendal Aussie equities analyst Elise McKay, who’s just returned from a US trip where she met with participants across the “DC” supply chain.
Data centres are facilities which house heavy-duty computer systems and components used to support resource-intensive applications such cloud computing, artificial intelligence training and data storage.
In Australia an example would be NEXTDC (ASX: NXT), which is held in a number of Pendal Aussie equity portfolios.
The accelerating shift to cloud computing (on-demand access to computing resources over the internet) is driving demand, along with “generative AI” applications such as ChatGPT.
But some data centre stocks are better positioned than others, cautions McKay.
She prefers established DC owners with existing capacity — due to the time it takes to acquire land, undertake construction and manage power requirement and other complexities.
“There’s strengthening demand for DCs and supply is tightening,” McKay says.
“In some major DC locations, such as Northern Virgina in the US, vacancy rates are at one per cent. In Australia it’s closer to 17 per cent.”
Strong demand and tight supply are conditions ripe for data centre owners to outperform — though there is a potential emerging constraint.
“There is not enough power available, especially for artificial intelligence (AI) applications,” Elise says.
Data centres use huge amounts of energy, estimated to be more than one per cent of global energy markets — and power requirements will grow demand is expcted to grow iline with DC footprints.
Access to power will a significant constraint for some players, particularly as the world focuses on the energy transition.
“It means that providers of data centres with available capacity will benefit while new entrants will be constrained by access to power,” she says.
“Power constraints are very material and data centre players need to be planning five to ten years out.
“They are now looking for solutions that go behind the meter. They are thinking about self-generation – in the future can they do small scale nuclear reactors to power data centres?
“US data centre giant Equinix is powering two Dublin two facilities with gas. This is a complex issue that needs to be solved.”
Data centres also need large amounts of water. The energy used in data centres produce heat, and the servers need to be cooled.
Technology is addressing some of the water challenges in data centres.
“New cooling technologies are being deployed with limited need to retrofit. While this is slightly more expensive, I don’t expect it to change return targets.”
“Because data centres are both power and water hungry, sustainability is now an increasing focus,” Elise says.
Elise believes it will ultimately result in stronger pricing and better returns for data centres with capacity.
Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.
She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.
Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.
Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at November 8, 2023.
PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.
An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.
Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.
Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.
For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com