The investing community is abuzz about data centers, particularly as they relate to artificial intelligence (AI) and cloud computing. Get up to speed with this review of the role data centers play in the technology ecosystem and five ways you can invest in data center growth.
Understanding data centers
Data centers are physical facilities that house technology components. Those components include servers, storage systems, networking switches and routers, backup power sources, and controls to manage the facility's temperature and humidity. Together, this equipment supports data storage, data processing, network connectivity, and other technology functions.
Before the advent of cloud computing, data centers were privately owned and located in or near business operations. Known as on-premise data centers, these facilities were owned, maintained, and managed by organizations with computing needs. A small law office might have had servers in a closet, for example. A global enterprise, on the other hand, may have had entire floors occupied by mainframe computers and related equipment.
Five ways to invest in data centers
The trends reveal several different ways to invest in data center growth. Five options include:
- Hardware providers. Nvidia (NVDA +2.14%), the leader in AI chips, has experienced extraordinary growth in demand for its data center products. Micron (MU +8.41%) is also benefitting from data center growth. The company supplies data center servers, storage, and memory solutions.
- Power providers. Utility company CMS Energy (CMS -0.39%) recently secured a power contract with a Michigan data center. According to Reuters, other utilities have also said they're seeing earnings rise from data center demand. Solar panel manufacturer First Solar (FSLR +2.86%) has acknowledged the trend as well.
- Cooling technology providers. Vertiv (VRT +7.33%) specializes in data center cooling, power, and rack storage.
- Cloud providers. The three dominant cloud providers are Amazon, Microsoft, and Alphabet.
- Data center real estate investment trusts (REITs). Iron Mountain (IRM -1.29%), Equinix (EQIX +0.08%), and Digital Realty Trust Inc (DLR +0.60%) are three REITs that own data centers around the world.
Investors looking to gain from data center growth can hold these and similar stocks individually. A more manageable solution, however, might be a themed ETF. Options include Pacer Benchmark Data and Infrastructure Real Estate SCTR ETF (SRVR +0.06%) and Global X Data Center & Digital Infrastructure ETF (NASDAQ:VPN). Relative to individual stocks, data center ETFs have the advantage of being diversified, which may contribute to lower risk and volatility.
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