How I'm Trading Data Centers, the Hottest Sector in the Market
The sure winners in the booming AI industry aren't companies developing applications but those that provide the leaders with essential 'picks and shovels.' Here are the key players.
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Market action is mixed on Tuesday morning as investors await economic news. Small-caps are lagging, and the Magnificent Seven MAGS are leading. There is some profit-taking in names that have recently performed the best, but there are still pockets of speculative action.
I'm looking for good setups and strong momentum, and the data center group is looking attractive.
The sure winners in a booming industry like artificial intelligence aren't the companies that are developing AI applications but those that provide those leaders with essential tools, services, and infrastructure. This theory is often referred to as a "picks and shovels" approach to the market and originates from the California Gold Rush, when merchants selling picks, shovels, and supplies to gold miners were the most consistently profitable.
A good example of the value of providing infrastructure is evident on Tuesday as Nebius Group N.V. NBIS confirmed a multi-billion dollar deal with Microsoft MSFT. Nebius will provide Microsoft access to dedicated GPU infrastructure capacity at its new data center in Vineland, New Jersey, over a five-year term. The total contract value is about $19.4 billion through 2031.
Microsoft may not be a big winner in AI, but Nebius is a pretty sure bet to do well by providing Microsoft with the essential tools it needs.
One of the most interesting aspects of this deal is that the size and scope are an indication that it is fairly early in the game. Major companies such as Microsoft are still demanding more resources and paying a substantial amount for them.
I highlighted NBIS on July 28 in this article. The stock is trading up more than 50% on Tuesday morning and on the screens of aggressive momentum investors.
This bodes well for the data center industry, and it is a good time to take a look at some of the other names in the group, which may be in position for big contracts.
There are three other data center stocks that are on my radar. All three have connections to bitcoin mining and have expanded their services to include AI cloud services and High-Performance Computing (HPC).
TeraWulf WULF has a significant and strategic partnership with Google GOOGL. Google is the largest shareholder of WULF and is supporting a relationship with Fluidstack, which builds and operates HPC clusters. The stock has been consolidating at a high level after recent Google news and is looking to break out over the $10 level
Cipher Mining CIFR also pivoted from bitcoin mining. Its facility in Texas has one of the lowest costs of energy. The stock chart broke out of a cup-with-handle formation over $7 and is now forming another high-level base.
IREN, Limited IREN is a favorite of growth investors. IREN is an Australia-based data center company using low-cost green energy. It has facilities in the U.S. and Canada. In its most recent quarter, revenues jumped 255% and it earned $0.70 per share versus a loss a year ago. It has the strongest momentum in the group and is highly ranked by Investors Business Daily.
There are a number of other names, but these are the key players in the hottest sector in the market.
At the time of publication, Rev Shark was long NBIS, WULF and IREN.
