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The Power of the Cloud

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The email header with the "For What It's Worth" logo, graphic that includes a hand holding a representation of a blooming flower that has money blooming at the top, and the tagline "Insights to invest in the world you want" underneath it.

Hi there!

Welcome to April, or as people who look at a lot of PowerPoint presentations call it, the start of Q2. Here’s what we’re watching:

  • The bulls are beating the bears, for now: Stocks have been climbing despite worries about interest rates, failing banks, and escalating tensions between Russia and NATO as Finland joined the alliance. If rate hikes end soon, the bulls will have history on their side. Since 1982, the S&P 500 rose five out of six times and gained an average of 8% in the three months after rates peaked. But many experts are warning that there are more twists and turns ahead, and JPMorgan CEO Jamie Dimon, in his annual letter to shareholders this week, said the banking crisis is not over.
  • Tech’s doing all the hard work: Like every group project in high school, a few heavyweight stocks are pulling the market higher. Just ten tech stocks account for 95% of S&P 500 returns in 2023, which doesn’t bode well, said Morgan Stanley’s Mike Wilson. A great way to see this is on an S&P 500 heat map. Since he sees a recession risk, Wilson recommends “defensive” sectors like consumer staples and health care instead of “cyclical” tech. Learn more about this in our prior coverage.
  • Gas prices to balloon: After falling in recent months, the prices of oil and gasoline are set to rise once again after OPEC countries decided to cut production. Financial experts see this as bad news because it could awaken the inflation dragon again, but some have also noted that it could accelerate the switch to cheaper, greener alternatives. As Bloomberg pointed out, the costs of battery and electric vehicle material, polysilicon for solar panels, and steel used in wind turbines have all fallen. In related news, more US electricity was generated from renewables than coal last year.

Looking back at Q1, one of the best-performing US-listed stocks was cloud computing services provider Fastly, which rallied 116.8%. Later, we’ll share insights on where financial advisors suggest you look to invest in the physical infrastructure that supports these “clouds” and the push to make them greener.

News you can use

Graphic of news publication with headline of "News"
  • It’s raining downgrades! Thousands of ETFs and mutual funds will have their ESG ratings lowered by MSCI at the end of April, reports Bloomberg. The major ratings provider has changed its methodology, and as a result just 0.2% of global funds will have the highest AAA rating, down from roughly 20%. This adjustment comes after investor complaints about generous ratings, the politicization of ESG, and embarrassing oversights in the case of India’s Adani Group and Russian assets. You can learn more about looking up the ESG ratings of stocks and funds here.
  • Cisco, Hilton, and American Express have topped Fortune’s latest list of the 100 Best Companies to Work For. Large firms are ranked on relevant data points and the feedback of over 1.3 million US employees. The researchers also found that happy workers and non-toxic workplaces are good for business. Employees at these 100 companies are more productive and more willing to go the extra mile on average.
  • Investors are pouring record amounts into money market funds, per reports. These are a type of mutual fund that invests in short-term debt instruments with very low risk, like certificates of deposit (CDs) and US Treasuries. One reason is that these funds offer higher returns than bank accounts, and the other is safety, as people fear bank failures and a recession. While they are great for stability and easy access to funds (liquidity), they aren’t meant for long-term investing goals like stocks and bonds are.

Asking for a friend….

We know there is a lot to think about these days, and it can sometimes be a bit overwhelming. To help with those nagging questions and so you have useful resources at your fingertips, here are few links to resources and past stories relevant in these turbulent times:

Figure in Focus: 258,000

Graphic of car with statement “258,000 electric vehicles were sold in the US from January to March this year"

That’s how many electric vehicles were sold in the US from January to March this year, according to data gathered by Motor Intelligence and reported on by the AP. This drives the EV share of new car sales to 7.2%, up from 5.8% last year.

As always, Tesla was in the lead and dominated with 161,630 cars sold, but the company that grabbed headlines was General Motors. The Detroit-based car maker has overtaken Ford to become the country’s second-biggest seller of EVs with 20,670 sales, up from only 457 during this period last year. Production issues have sent Ford to fifth place after Hyundai/Kia and Volkswagen.

What’s clear is that affordability is going to matter in the EV race. Tesla has been slashing the cost of its cars as its rivals expand production, which has some analysts worried about profitability. GM’s Chevrolet Bolt, which is America’s cheapest EV at a starting price of $27,495, made up the majority of its Q1 EV sales.

Warehouses of the digital age

Graphic of servers floating in clouds with leaves and trees floating near them.

What do scrolling through Instagram, trading Slack messages with your work BFF, and generating haikus in ChatGPT have in common (besides being fine ways to procrastinate from nine-to-five)? They all use data. Practically every moment in our lives these days involves a never-ending stream of data — even planning an off-the-grid vacation typically involves booking a stay online or researching trails in an app.

Data powers our lives, but where does the data live? Every photo you save in the cloud, every show you stream on Netflix, every second of footage from your doorbell camera all get stored on a server in a massive data warehouse. Our growing reliance on technology is fueling demand for data centers in pretty much every corner of the globe.

Despite our reliance on data centers, most of us don’t ever think about them, so they can seem like an enigma to many investors. We answer some of the top questions you may have if you’re thinking about how to gain exposure to this growing market.

What makes data centers attractive investments?

In a word — demand. In the data center market, demand is measured by power consumption, reflecting the number of servers a data center can hold. In the US alone, McKinsey expects demand to reach 35 gigawatts (GW) by 2030, up from 17 GW in 2022. Yes, if the projection plays out, the industry will more than double in size in just eight years.

Of course, with any investment comes risk. Like a lot of other businesses, data center real estate investment trusts (REITs) face the pain of rising interest rates, since they tend to borrow a lot of money to expand. There’s also the risk that data center operators might build too many facilities in their rush to meet demand, pushing down rents and cutting into profitability. Despite these challenges, many analysts remain bullish on the sector.

Where should I start looking if I want to learn more about investing in data centers?

Data centers are considered real estate, and analysts we spoke to say the easiest way for retail investors like yourself to invest is usually through REITs, which are publicly traded just like stocks. Data center REITs own a portfolio of facilities that they rent to tenants, who then fill the space with their networking equipment and servers.

There are a couple of pure-play data center REITs that focus solely on owning and operating data centers — Digital Realty Trust and Equinix — for you to consider as you do your own research. A few other REITs own data centers alongside other property types. Examples include:

  • Iron Mountain: specializes in storing physical records but also owns data centers and provides related services
  • American Tower: owns communications infrastructure like wireless towers as well as data centers
  • Digital Bridge: manages a portfolio of digital infrastructure assets including cell towers, data centers, fiber, small cells, and edge infrastructure

Are there other options I should look into?

Tech giants like Amazon, Apple, Google, and Microsoft need massive data centers for their cloud operations — these companies are known as hyperscalers in the data center world. Buying the stock of a hyperscaler gives you exposure not only to its cloud business but also to every other bit of the company.

Experts also note there’s also Dropbox, a pure-play cloud computing stock, and adjacent companies that provide equipment and services for data centers. Examples include Schneider Electric, which offers various solutions and services to build and retrofit data centers, along with NVIDIA and Juniper Networks, which both make hardware and software to power data centers.

If you don’t want to put all your eggs in one basket, investing experts also suggest considering an exchange-traded fund (ETF), which gives you exposure to a whole portfolio of companies in the sector. ETFs focused on the data center market include the Global X Data Center REITs & Digital Infrastructure ETF and the Pacer Benchmark Data & Infrastructure Real Estate ETF.

Don’t data centers have a big environmental impact?

Yes, sending an email is a lot dirtier than it might seem if you live in an area where electricity is generated by fossil fuels. By one estimate, if you combined all the world’s data centers into one, it would be the fifth largest energy consumer in the world. The industry’s need for power is even staining the power grid in some places. Last year, Dominion Energy warned that it was struggling to supply enough power for new data centers in Virginia — the world’s top data center hub.

Luckily, the industry is starting to clean up its act, thanks in part to pressure from corporate customers trying to go carbon neutral. The amount of renewable energy contracted by data center operators increased by 50% from 2022 to 2023. Meanwhile, operators are also investing in more efficient cooling equipment and systems and testing innovative strategies like locating them under public swimming pools. Some players are further along in their sustainability journeys than others, so if that’s a priority for you, do your research to see how committed a company is to going green.

Sustainability Magazine’s list of ten sustainable data center companies identifies some eco-friendly players, but note that not all the companies on their list are publicly traded. Also, Data Center Knowledge recently highlighted several companies at the forefront of next-generation sustainability technologies — as well as a few that have been called out for exaggerating their environmental gains.

It’s unlikely that the world will start using less data anytime in the near future. So hopefully, with continued attention and pressure from both customers and investors, the data center industry can help make all of our digital footprints a little greener.

Before you go -

Easter, Passover, and Ramadan all in one week — oh, my! Whether you are observing a holiday this week or not, Mike Allen at Axios was kind enough to leverage this unique week to remind us all of the importance of charitable giving and supporting those in need. Also could be helpful when filling out your taxes next year… Looking for some giving opportunities? Check out Network for Good.

** FWIW team members own shares of Amazon, Apple, Cisco, General Motors, Google, Hilton, Microsoft, and Tesla.

Want to learn a bit more about the writers behind FWIW? Have an idea you would like us to cover in the future?