We expect high single-digit earnings growth in the future from the asset class, with the potential for upside should current trends accelerate.
The surge in investor focus on generative artificial intelligence (AI) has led to one of the most powerful rallies in technology stocks in recent memory.
In our view, generative AI has the potential to be a game changer not only in our everyday lives but also in the growth profiles of the infrastructure supporting it. We are currently seeing strong pricing power for data centre owners, accelerating load growth for public utilities, and increased demand for renewable developers and low-carbon portfolios to provide clean energy to support data centre assets.
This generative AI-related growth comes in addition to infrastructure’s broader secular underpinnings, which include the demands for global decarbonisation, energy security and modernised assets.
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Infrastructure’s irreplaceable role in AI
Current data centre capacity, ramping power/cooling needs and access to power for new-build data centre assets are bottlenecks to generative AI-related growth. Today, high occupancies of data centres are already spurring pricing power and margin improvements for existing essential assets in those listed companies.
For example, vacancy rates are at a decade-low across North American markets, while 2023 data centre leasing activity is likely to have doubled 2022 levels and finish eight times above what was recorded in 2019.
Power use at existing facilities is also on the rise, as it is estimated that generative AI requires 20-100 times more power compared to data centre usage prior. For example, a generative AI purpose-built data centre requires a minimum of 250MW of capacity, compared to a historical data centre capacity size of circa 10MW.
While power use is increasing, transmission grids are unprepared and new investment is required to support generation connections. Generative AI-related demand in the power grid is expected to grow at a 30% compound annual growth rate (CAGR) over the next five years, with some estimates coming in as high as 70%.
In response to this phenomenon, major listed utilities are multiplying their forecasts for electricity demand growth. Industry-wide, current levels of anticipated power growth for the next five years double expectations as of 2022 and are more than 9 times the long-run average.
Increased load growth represents a paradigm shift for US utilities, with the potential to enhance earnings, increase required investment and further improve long-term earnings visibility.
In addition, the draw for low-carbon generation from generative AI and its data centres is immense; it is spurred by data centre developers prioritising green power to minimise carbon footprints in the face of unprecedented growth.
In fact, renewable power purchase agreements (PPAs) from Amazon, Google, Meta and Microsoft have ramped up by 6 times compared with 2018 levels, and the development backlog for leading listed renewable energy developers is currently dominated by data centre-related projects. By 2025, generative AI-led PPAs could reach levels equal to half of the current market.
Secular growth at a discount
Given the secular growth potential of infrastructure, valuations remain at a discount today. We expect high single-digit earnings growth in the future from the asset class, with the potential for upside should current trends accelerate.
Following a historic lag to large-cap tech and broader equities last year, as well as recent underperformance to private equity infrastructure indices, infrastructure’s price for its growth is compelling.
On a 2025 price/earnings to growth ratio (PEG ratio) we see listed infrastructure potentially trading at a 1.5x multiple for 2025, compared to 2x for the ‘Magnificent 7’.
On a relative valuation basis, infrastructure is at a 10% discount to global equities, compared to its history of a 10% premium. When we further consider the private market and analyse notable large-scale privatisations over the past five years, we see listed infrastructure trading at a 30% discount to private equity acquisitions.
Jeremy Anagnos is portfolio manager of Nordea’s Global Listed Infrastructure strategy. The views expressed above should not be taken as investment advice.