Growing political and community pushback is creating new headwinds for data center stocks, with concerns ranging from rising electricity demand to water consumption. Fears that data centers could drive up power bills, strain local water supplies and alter the surrounding landscape have emerged as major roadblocks to new developments.
Tougher regulatory and community requirements, coupled with rising development costs, are likely to slow the pace of data center expansion and reshape the competitive landscape. As a result, the next phase of the buildout could favor companies better equipped to navigate these challenges, creating a new set of winners.
The Data Center Boom Runs Into Political Headwinds
As per an article by Politico, data center construction is facing growing bipartisan resistance, with lawmakers across the political spectrum calling for tighter curbs and temporary moratoriums on new projects. One key concern investors should watch is the political and regulatory shift on data center expansion, as former supporters increasingly turn toward stricter oversight.
Pennsylvania, Texas and Michigan have all moved toward tighter oversight or restrictions on new projects, ranging from local approval requirements and temporary pauses to proposed moratoriums, as quoted on the Politico article. As per Jim Cramer of CNBC, Pennsylvania and Texas have seen governors shift from supporting data center development to backing stricter requirements, as quoted on a CNBC article.
Additionally, as per the abovementioned Politico article, the generous tax incentives states once used to attract data center investments are increasingly facing political scrutiny. The potential loss of these benefits could further increase buildout costs.
The Data Center Opportunity is Changing, Not Disappearing
The growing backlash against data center development does not mean investors should walk away from the trade. Per Cramer, the opportunity remains, but its next wave of winners could look very different.
The changing landscape could also prompt investors to become more selective about data center beneficiaries. As quoted on the CNBC article, Cramer noted that uncertainty over the pace of new development may make investors more reluctant to pay premium valuations for companies tied to the buildout, despite strong underlying demand.
However, this shift could ultimately favor hyperscalers such as Amazon AMZN, Alphabet GOOGL, Microsoft MSFT and Meta META.
Hyperscalers Could Turn Headwinds Into an Advantage
Cramer sees the political backlash as a major advantage for hyperscalers. The growing political and regulatory hurdles could strengthen the advantage of hyperscalers, positioning them to gain from the data center trade.
Per the “Mad Money” host, hyperscalers could emerge as the biggest beneficiaries of the changing data center landscape, thanks to their financial strength. Their ability to absorb higher costs, meet stricter requirements and address community concerns could allow them to continue developing data centers even as smaller, speculative developers face greater hurdles.
Cramer also pointed out that a decline in speculative development could ease competition for land, labor and electricity, potentially giving hyperscalers access to these resources at lower costs.
Offering a counterpoint to the growing political backlash, President Trump voiced support for data center development, calling the increasing scrutiny of the industry a mistake during a radio interview hosted by Michael Cohen, as quoted on SiliconANGLE. Trump highlighted the economic benefits of data center development, noting that new projects create jobs and generate substantial tax revenues for the towns and cities that host them.
ETFs for a More Concentrated Hyperscaler Play
Investors can consider the following funds to gain a more concentrated exposure to hyperscalers.
Defiance AI Hyperscale Leaders ETF AIHY
Defiance AI Hyperscale Leaders ETF employs an active strategy, designed to provide investors with exposure to hyperscalers. The fund has a basket of 10 securities, charging an annual fee of 0.76%. AIHY has gathered an asset base of $2.1 million, having being launched in late July, this year.
Defiance AI Hyperscale Leaders ETF has heavy exposure to MSFT (22.46%), AMZN (20.42%), GOOGL (19.67%) and META (17.03%).
Roundhill Magnificent Seven ETF MAGS
Roundhill Magnificent Seven ETF also employs an active strategy, offering equal-weight exposure to the “Magnificent Seven” stocks. The fund has amassed an asset base of $4.16 billion and charges an annual fee of 0.30%.
Roundhill Magnificent Seven ETF has heavy exposure to MSFT (17.91%), AMZN (14.99%), META (13.58%) and GOOGL (13.29%).
Corgi Mag 7 ETF CMAG
Corgi Mag 7 ETF is also an actively managed fund with concentrated exposure to Mag-7 stocks. The fund has amassed an asset base of $3.8 million and charges an annual fee of 0.20%.
Corgi Mag 7 ETF has exposure to GOOGL (9.09%), MSFT (8.01%), AMZN (5.74%) and META (3.06%).
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This article originally published on Zacks Investment Research (zacks.com).
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