Amazon (AMZN +3.88%) managed to surprise many investors again last week. News came out that it will partner with Dominion Energy (D +0.05%) to explore the development of nuclear energy production in the U.S. The amount being invested in this new partnership was not made public.
Not many investors were expecting this news, even though a conglomerate like Amazon has found its way into multiple industries over its existence. The question now for investors is how this recent news affects the trajectory of Amazon stock.
Rather than giving investors another reason to buy Amazon stock, I'm inclined to think this news makes Amazon stock a hold. Here's why.
NASDAQ: AMZN
Key Data Points
Why is Amazon interested in nuclear energy?
First, investors should understand that Amazon has given no indication it wants to become a full-fledged energy provider. So this news should not change the stock's overall investment thesis. Instead, Amazon took this action to get ahead of what it sees as a growing problem: Finding enough reasonably priced electricity to power its expanding collection of data centers.
According to Goldman Sachs, data centers currently claim 1% to 2% of worldwide electricity usage. Large data centers often require 100 megawatts (MW) of electricity or more. 100 MW is enough to power 80,000 to 100,000 average homes. Grand View Research estimates that the data center industry will grow at a compound annual growth rate (CAGR) of 11% through 2030. At that CAGR, the number of data centers will double approximately every seven years.
Clearly, energy is critical to Amazon's profit plans. Since Amazon Web Services (AWS), the company's cloud computing arm, generates most of Amazon's operating income, data centers are the lifeblood of AWS. The company is the largest provider of cloud infrastructure services, so staying ahead of emerging rivals such as Microsoft and Google parent Alphabet is essential to its success.
Image source: Statista.
Moreover, the cloud industry is also vital to the burgeoning artificial intelligence (AI) boom as so many AI workloads run in the cloud. Hence, Amazon needs to ensure it does not lose customers because of a lack of electricity.
The Dominion Energy partnership
Given that need, its partnership with Dominion Energy to explore what it would take to build small modular reactors (SMRs) is a logical response. The company sees nuclear energy as a partial solution to finding sufficient amounts of clean energy to maintain AWS' operations.
Amazon chose Dominion specifically because Amazon already operates 76 data centers in Dominion's home state of Virginia, according to technology marketplace Datacenters.com. The state claims the largest concentration of data centers in the world, with an estimated 80% of Virginia's data center industry located in Loudoun County, just west of Washington, D.C.
Additionally, such a partnership ensures that Amazon and Dominion will build data centers and SMRs in close proximity to one another and design them to serve Amazon's purposes. This means the data centers will rely less on the U.S.'s strained energy grid, reducing the likelihood of service interruptions. That can also become a competitive advantage for Amazon, especially if competitors do not proactively address their future electricity needs.
The Amazon investment thesis
Ultimately, the partnership with Dominion does not change Amazon's investment thesis. Instead, it maintains it. It makes Amazon one of the few non-utilities to directly involve itself in the generation of electricity, which may sound strange since the alliance is unlikely to directly increase Amazon's net income.
However, the partnership is probably necessary as the data center industry places enormous demands on an already strained electrical grid. In fact, given the current state of America's electric infrastructure, not addressing the issue could have stopped Amazon's growth in its tracks and may have forced numerous investors to sell the stock.
Assuming the SMRs can produce safe, clean, and reliable electricity in adequate amounts, Amazon can now carry out its vision for the cloud and, by extension, artificial intelligence (AI). This increases the likelihood that the Amazon investment thesis will stay on track as it proactively addresses a major obstacle to success.
