We recently compiled a list of the 20 Industrial Stocks Already Riding the AI Wave. In this article, we are going to take a look at where Eaton Corporation plc (NYSE:ETN) stands against the other industrial stocks that are already riding the AI wave.
When investors think of artificial intelligence (AI), they usually relate the thought to prominent hardware and software companies working in the technology sector. However, a much wider understanding of AI is needed in order to pick out the best stocks that are likely to ride the AI wave as it evolves over time. Contrary to public opinion, one of the smartest ways of jumping on the AI bandwagon is by playing the industrial sector. Since the start of 2023, the beginning of the AI boom in other words, industrial stocks have jumped close to 30% in value. Of these, the firms that are directly exposed to AI verticals have more than doubled in value. According to a Goldman Sachs study on the matter, in the fourth quarter of 2023, over 30% of industrial firms mentioned AI in their earnings reports, up from just 10% in the same period the preceding year.
In addition to the obvious picks in the semiconductor space, investors should turn their attention towards industrial firms that provide construction, engineering, electronics, cooling, and connectivity services. Even though these firms derive only a portion of their revenue from AI at the present, the explosive growth potential of AI can be a meaningful driver of their revenues in the coming months. Indeed, some indications of this can be gleaned from the fact that industrial firms linked to AI grew their revenues by almost 15% last year. This number is comfortably above their non-AI peers and the S&P 500 average for 2023. Industrial firms help manage the computational powers of AI data centers, make high speed connections possible, and also make sure they operate at optimal temperatures.
Lazar Naiker, an analyst at capital markets firm AGF Investments, explains how traditional data centers are different from AI ones. Essentially, AI data centers are powered by graphic processing units (GPUs), while their traditional counterparts are powered by central processing units (CPUs). GPUs operate at a faster speed and thus need higher bandwidth cables for communication with other GPUs. There is a 10 to 1 difference in the number of cables needed to power GPUs and CPUs. AI applications require constant communication between data center GPUs as well, the development of neural networks, so to speak, whereas this is not the case for CPUs. Another key difference is power consumption. Per Naiker, the GPU uses almost 5 times the power required by a CPU.
Our Methodology
For this article, we selected industrial stocks that posted more than 25% gains in 2024. From this list, we selected firms that have links to the AI universe and approximated percentage revenues based on these links. These stocks are also popular among hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician standing in the middle of a power station, inspecting a power distribution system.
Eaton Corporation plc (NYSE:ETN)
Number of Hedge Fund Holders: 85
YTD Return as of August 1: 27%
Approximate Percentage Revenue from AI: 14%
Eaton Corporation plc (NYSE:ETN) operates as a power management company worldwide. The primary AI catalyst for the firm is sales of data center equipment. It makes and sells electrical components used in data centers across the globe. AI trends sweeping the market are already helping the firm increase order. The backlog for the electrical segment of the business has jumped to more than $11 billion, quadrupling from pre-COVID levels. The company also continues to impress investors with organic sales growth, margin expansion, and very strong free-cash-flow generation.
Craig Arnold, the CEO of Eaton Corporation plc (NYSE:ETN), said during the second quarter earnings call that the company expected that the major part of the growth in the AI data center was still ahead, noting that only 5 to 10% of the capital spending of large businesses was directed towards AI data centers in the present market. Arnold clarified, however, that the backlog of data center build, in excess of $140 billion, represented eight years of business that his company was well-positioned to take advantage of in the coming months and years.
In its Q1 2024 investor letter, Ave Maria, an asset management firm, highlighted a few stocks and Eaton Corporation plc (NYSE:ETN) was one of them. Here is what the fund said:
“Eaton Corporation plc (NYSE:ETN) is an intelligent power management company. The company is a long-term beneficiary in the trend towards electrification, energy transition and digitalization. Eaton is also benefiting from unprecedented global stimuli such as the Inflation Reduction Act, Infrastructure Investment and Jobs Act, the Chips and Science Act and the EU recovery plan known as the NextGenerationEU.”
Overall ETN ranks 13th on our list of the best industrial stocks that are already riding the AI wave. You can visit 20 Industrial Stocks Already Riding the AI Wave to see the other industrial stocks that are on hedge funds’ radar. While we acknowledge the potential of ETN as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ETN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.