The generative AI-related infrastructure buildouts are expected to benefit companies within the Industrials and Materials sectors, analysts at Wells Fargo said in a Wednesday note.
As governments and private-sector entities worldwide propose substantial AI-related expenditures, the need to upgrade infrastructure to accommodate these technological advancements becomes crucial, they noted.
When considering increasing portfolio exposure to industrial and Materials companies, investors need to understand several high-level characteristics of these sectors. The foremost consideration is the role these companies will play in contributing to the technology-related infrastructure buildout, the analysts emphasized.
“While most of the market focus thus far has been on who can currently or potentially quickly monetize generative Al technologies from a product and revenue standpoint, the fact remains that little can happen to actually ramp up use of these products until the infrastructure has been adequately updated,” the analysts wrote.
According to the analysts, companies within the Industrials and Materials sectors play a vital role here. These sectors not only provide exposure to AI advancements but also maintain lower valuations compared to the "Magnificent 7" tech stocks, they explained.
They also said the companies categorized by Standard & Poor's as part of these sectors are responsible for the key updates and construction of plants and electrical grids needed to support AI technologies in the future.
“These sectors tend to have a good deal of international exposure. Recent FactSet data shows 33% of Industrials-sector revenues and nearly 52% of Materials-sector revenues come from outside the U.S,” the analysts said.
“That means revenues related to infrastructure builds and electrical upgrades around the world will likely contribute to earnings for involved domestic companies.”
Companies in the Industrials sector, particularly those involved in building products, construction and engineering, construction machinery, heavy transportation equipment, industrial conglomerates, and electrical components, are well-positioned to capitalize on the AI spending surge.
Similarly, the Materials sector stands to gain, with sub-industries such as construction materials, copper, and steel expected to play a vital role. These raw materials are essential for building data centers and power grids, which are fundamental components of AI infrastructure.
“Think of this as the raw materials such as concrete, etc., that go into the building of data centers and power grids,” the analysts said.
“While both of these sectors are traditionally very tied to the economy, we believe the generative Al push will result in large-scale infrastructure buildouts that will benefit the basic industries that both of these sectors represent, even in a slower-growth economy,” they concluded.