Internet Is Becoming a Power Plant: Follow the Money

Level 2 - Value Investor

Welcome Avatar! For those on the paid side, you know that one of the major thesis ideas we have for the future = energy constraint. We’re going to provide a high level summary of why this is the case and leave the investment update for Wednesday.

In a sentence? All of these robots need to be charged by *something*

For stocks, we’re big fans of investing in the constraints. For those that have read us a long time, it was a lot easier to invest in the Semiconductor Index (SMH) than figure out every single chip company. You shouldn’t have time for that anyway since you’re too busy building wifi money. Crypto is the same. It’s a honey pot for government money printing which has a 0.0000000001% of going negative long-term (only issue is it is cyclical).

Our general theory on Power Demands follows the same thought process. Could be wrong like anything in life but it’s worth spelling out much like our other general themes: degeneracy, rich vs. poor divide, large companies vs. niche companies and avoiding the middle which gets squeezed

Part 1: Infrastructure Matters Again

From the 2000s until around 2020 or so, you didn’t need a significant amount of computing power. In fact, there was a time frame where you could just run a laptop and it would last years. Click fast forward and now we’re in a completely different revolution, a Power Revolution. While you don’t need your own Data Center running in the middle of nowhere, you do need access to it if your plan is to employ a bunch of AI agents and begin trusting code for blocking/tackling.

Underpinning all of that? A huge infrastructure build out. You still need the computer chips but you need much more than that. You need servers, land, cooling, turbines, electricians, etc. Up until now, you had enough space that the bottle neck was just “Faster processing power”. Now the processing power is so fast that it is causing stress on the entire electrical system (data center over heating, not enough land, cooling is breaking down etc.).

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Once you understand this from a high level, you can then drill down to chain of events. 5-10 years ago the debate was around what AI chips would win and if you knew nothing it was simply “buy all of them” since you knew they would invest billions and billions into the industry. We’re way beyond “is AI real” at this point.

Keep it simple. Three steps:

1. Chips: All the chips that go into data centers. This has already played out and returns are likely more “stable” vs the past 5 years or so

2. Data Center Stress: You’re seeing this right now. Data centers are being built out rapidly. While it comes in big waves, every major company is not going to skip on their Data Center spending

3. Power: The electrical grid, energy production/use, storing all the energy and getting people to upgrade the cooling systems = where the next bottle neck is

You can make an argument that we’re already somewhere between point 2 and 3 but that’s largely splitting hairs. Big picture, think we can all agree that everyone knows AI is real and you need chips to do it. However. Most are not thinking about “how this stuff will be powered and sustained long-term”

This also explains our general investment philosophy of “buy the monopoly winners and also buy whatever they need to run their business”

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While we would put a near zero percent chance of this being some perfect linear increase as depicted by Goldman, the trend is agreeable. This is what matters for 99% of the population. If you invested in technology for the past 10-20 years (QQQ) there were years where it was down double digits. Doesn’t mean anything when the following year goes up 20-30% to make up for it.

To condense all of this, why bother figuring out which AI agent customer service chatbot is going to work when you can just invest in the people collecting checks from GOOGL/AMZN etc. Big tech is having another stellar year.

They will spend. Follow the money. Invest in what they buy.

Part 2: From Processing Power to Actual Power

Technology and time move at alarming rates. It seems like yesterday that the bottleneck was a lot simpler. You had all these servers and you needed to go in there and replace all the chips. Swap out the GPU/CPU/Cable etc. That was basically it.

Now we’re entering a new problem. That server is running too hot. That cooling tower is hitting max load. The electrical grid is going out sometimes. Simply swapping doesn’t work anymore, you need to bring in new physical servers + build on the land.

In short, the server won’t run if the electric is out! An air conditioning unit in Phoenix has no value if it won’t turn on.

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“This Sounds Obvious”

Not really. If you were to go back and look at your cost of living you’d see something like this. Inflation adjusted, the cost of electricity hasn’t changed in about 50 years (outside a few anomaly years).

The conclusion from that is “people are assuming utilities will be flat into perpetuity inflation adjusted”.

Everyone is upside down.

If robots drive down the cost of manufacturing, transportation, etc. This means they would be using a ton of energy/electricity. Therefore the cost of everything else goes down a bit, however, the cost of electricity goes up on a relative basis.

• Last 50 Years: electrical cost thought of as flat. Everything else goes up in price

• Next Few Decades? Electrical cost goes up. Prices of other items go down a bit since tech is deflationary by definition

Quick Example: Lets say you think inflation is 3% forever. Before that would mean electrical goes up 3% (same as past 50 years). The rest of your spending sees some items go up 6% other items go up 0% (such as TVs) and it nets out to 3%.

New world. Inflation is 3% however electrical goes up more than 3%. The rest of your spending goes up slightly less than 3% but your total spending is up 3%. Both net out to 3% but the new world has electrical going up faster to offset the declining cost of manufacturing goods.

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Similar to Internet Upgrades

Before the internet, we had 56K dial up. You had telephone lines posted on these large metal/wooden rods.

The infrastructure was not set up and we rolled out new infrastructure to get fast internet to every house. This is pretty similar.

The current electrical grid is set up to run refrigerators, heaters, air conditioning, TVs and some basic computers. It was not set up to run a million servers with millions of GPUs inside running full blast 24/7/365.

Why We Care: This is all important for two reasons: 1) people assume utilities are flat with inflation and what if that is wrong? Pretty brutal and 2) since we know all of this has a good chance of being true, your downside case is basically tracking hyperscale spending

You’re basically buying a hedge against your electrical bill with inflation adjusted upside.

Part 3: Boring Industry Becomes Interesting

Instead of doing the basic calculation and saying “ahh forget this i’ll just buy utility companies”, it is better to invest in the high tech companies that are building the next generation energy infrastructure.

Think about it. Who has the pricing power in this case? The entity that can deliver the best solution for powering a gazillion servers running a gazillion GPUs at once. We already know that the old stuff isn’t built for the new environment.

• Nuclear, renewables, storage, backup power (gas/power wall/other generator)

• Transformers, substations, cooling, switchgear, transmission, cables, optical connections

• Electrical contractors, engineering firms, industrial services

While everyone is worried about some new bot that was created, we just listed 14 different places where you could invest, get a decent paying job and see growth for the next decade or so.

We know this “isn’t good enough” because everyone needs to know what app is going to 100x tomorrow. Those same people will invest their time and money into a Hail Mary and get a zero.

Avoid the Blind Buy

There is a sweet spot. As you can see, blindly buying utility companies is a bit foolish. They unlikely have the pricing power and a single natural disaster could take out their main build out and revenue source.

Instead do some bigger picture research and find the items that go into next generational energy buildouts without the blow up risk. As an example, you’re better off buying the company that sells the cooling fluid to all the servers vs. the REIT that hosts all the servers. If the data center goes down the reit gets hit. If every data center goes down tomorrow? The cooling fluid provider still gets paid. They benefit from the build out but are not responsible for outside events.

For Fun, if you want to play the specific Geo Game here is a good starting point. We keep it simple (lazier) and would just look at companies with a large sales force presence in the highest data center growth regions.

Summary

We’re making an argument for a new bottle neck at the infrastructure level. Before the simple phrase was “name a world where you need less computing power”. This was probably the easiest way to deliver the message.

Now it’s similar. “name a world where you need less power”. It’s the exact same thing just at a different scale.

We’ll go over some of the ones that are interesting on Wednesday. Infrastructure companies, grid equipment, nuclear and more. Good time for an update!

On that note, Stay Toon’d!

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are *opinions* written by an anonymous group of Ex-Wall Street Tech Bankers and software engineers who moved into affiliate marketing and e-commerce.

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