Semiconductor stocks have been some of the biggest beneficiaries of the ongoing artificial intelligence (AI) revolution. Chipsets known as graphics processing units (GPUs) are important for the development of generative AI, and also for businesses Nvidia, Advanced micro devicesAnd Taiwanese semiconductor have proven to be the early winners in GPUs so far.
IT infrastructure is an area that touches on the GPU landscape, and I still think it’s being overlooked. GPUs are stored in data centers. Wouldn’t it stand to reason that as demand for these chips increases, so will the need for data center services?
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Apparently, billionaire investor Ken Griffin of Citadel Advisors might think so. According to Citadel’s most recent 13F filing, the fund has increased its exposure to data center stocks Equinix(NASDAQ: EQIX) by 704% in the second quarter, bringing the position to approximately 564,000 shares.
I’ll break down why I see Equinix as an under-the-radar opportunity in AI and assess whether I think the stock is a good buy right now.
One of the most popular applications in AI right now is the large language model (LLM). LLMs like ChatGPT, Claude and Gemini have a lot of features: from image creation, software code generation, to generic search functionality, these models are changing the way people interact in the workplace and online.
And while LLMs have the ability to generate answers to your questions almost instantly, the underlying construct that supports these models is much more complex than you may realize. It takes an incredibly long time to develop generative AI that can process queries and complete tasks quickly. The reason is that these machine learning (ML) applications are constantly trained and undergo inference testing. Another way to look at it is that AI models are constantly processing large amounts of data through complex algorithms – which is indeed a major tailwind for the data center market.
During Equinix’s last earnings call, CEO Adaire Fox-Martin made an interesting analogy when he compared the rise of AI to that of cloud computing a decade ago. He stated that “in the near term, AI training workloads will drive significant demand”, while inference demand is also “beginning to take shape”.
Image source: Getty Images.
Today, cloud services have become a billion-dollar opportunity for tech enthusiasts like Amazon, Alphabet, MicrosoftAnd Oracle. One reason for this is that demand for digital infrastructure has increased in parallel with companies investing more heavily in data to make better-informed, more efficient decisions.
But that said, the cloud’s rise did not happen overnight. Over many years, Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform have evolved into more advanced products, spanning database management, cybersecurity, and much more.
Like cloud infrastructure, AI platforms should become more advanced in the coming years. Equinix’s core data center services, including the xScale suite, will benefit from the continued tailwinds driving demand for AI, especially its $1 trillion IT infrastructure opportunity.
Fox-Martin gave investors a taste of the long-term effects AI could have on the business when he shared: “Similar to the cloud, Equinix remains the preferred location for network nodes as customers look for the right connectivity solutions for data ingestion and distribution. .”
The chart compares Equinix to a small, competitive cohort based on price-to-earnings (P/E) ratio. Although Equinix is right in between Digital real estate And Iron Mountaina price-earnings ratio of almost 80 is by no means a bargain. The average future price-earnings ratio of the S&P500 is only around 23.
EQIX PE ratio (forward) chart
There are a number of important insights from these trends. First, even though Equinix and its competitors are a bit pricey, investors appear to be placing a premium on the data center market compared to the broader market. This could indicate that data center stocks remain an attractive choice among AI investors.
Furthermore, all three companies have experienced notable valuation growth in recent months. This trend could support the idea that the data center part of the AI realm is starting to gain more attention and become an increasingly lucrative opportunity.
In the coming weeks, institutional investors like Citadel will release updated 13F filings for the third quarter. I would keep a close eye on whether Citadel and others on Wall Street add or reduce positions in data center stocks.
As Fox-Martin mentioned, the AI story is still in its infancy and demand for data processing and storage protocols should continue to rise as AI needs become more robust. For now, I think Equinix stock is worth keeping an eye on, but I see opportunity to invest at more reasonable valuations down the road.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions at Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Digital Realty Trust, Equinix, Iron Mountain, Microsoft, Nvidia, Oracle, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
Billionaire Ken Griffin Just Increased His Position in This Data Center Stock by 704% (Hint: It’s Not Nvidia) was originally published by The Motley Fool
