The steep pullback in tech stocks in recent days shouldn’t be a surprise after the strong rally driven by Artificial Intelligence (AI) this year drove valuations to extended levels. Volatility should be expected as the AI sector finds its feet, but the long-term outlook for the segment should be positive.
AI is broader than powerful computer chips and large computer servers providing cloud services. The growth in AI is expected to also drive demand for products and services that are not directly connected to the tech industry. Providers of power and distributors of fuel needed to create the electricity, for example, will also play key roles in the successful expansion of AI services.
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TC Energy
TC Energy (TSX: TRP) operates more than 90,000 km of natural gas transmission pipelines and 650 billion cubic feet of natural gas storage capacity in Canada, the United States, and Mexico. The company also has electricity generation facilities.
Data centres that are required to run AI consume significant amounts of electricity that have to be reliable and scalable to cover demand surges. With national and regional power grids in need of upgrades and political roadblocks preventing the infrastructure from getting built quickly, there is going to be demand for AI data centres to have their own power stations near the facilities. Renewable energy is the ideal source, but solar and wind power aren’t always an option. As a result, a popular alternative will be to build power stations fuelled by natural gas.
TC Energy’s extensive natural gas infrastructure in Canada, the United States, and Mexico puts the company in a good position to supply the natural gas required for data centre power generation. In a recent statement during the second-quarter (Q2) 2024 presentations the company said builders of data centres are looking to locate close to reliable energy supply to tap fuel for their on-site power generation.
TC Energy reported solid Q2 2024 results and has a large capital program on the go to drive revenue and cash flow growth. The stock trades near $59 at the time of writing compared to $74 in 2022, so there is decent upside potential, even after the rally that has occurred off the 2023 lows.
Investors who buy TRP stock at the current level can get a 6.5% dividend yield. TC Energy has increased the dividend in each of the past 24 years.
Enbridge
Enbridge (TSX: ENB) is widely known for its oil pipeline infrastructure that moves nearly a third of the oil produced in Canada and the United States. A shift in its growth strategy in recent years, however, has balanced out the asset base to the point where Enbridge’s renewables and natural gas infrastructure and utility operations are as large as the legacy oil assets.
Enbridge is in the process of completing the final part of its US$14 billion acquisition of three natural gas utilities in the United States. The addition of the assets will make Enbridge the largest natural gas utility operator in North America. Enbridge’s natural gas transmission networks already move 20% of the natural gas used by American homes and businesses.
More than 300 new data centres are currently planned or under construction in the United States. Like TC Energy, Enbridge should benefit from the anticipated expansion of natural gas demand to fuel gas-fired power stations. Enbridge’s renewables division could also benefit from the demand for green power when it can be used in conjunction with other energy sources to lower environmental impacts for data centre operators.
Enbridge recently reported record second-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA) and increased guidance for 2024 financial results. The company has a $24 billion capital program on the go that is expected to drive steady growth in distributable cash flow.
Enbridge raised the dividend in each of the past 29 years. At the current share price near $52, investors can get a dividend yield of 7%.
The bottom line on top AI stocks
TC Energy and Enbridge are good examples of non-tech stocks that should benefit from AI growth in the coming years. If you have some cash to put to work, these stocks deserve to be on your radar.
