AGF investing experts weigh in on potential from rise of digital and renewable technologies
Described by U.S. President Joe Biden as “once-in-a-lifetime investment,” the country’s US$1.2-trillion spending plan passed in November puts the spotlight on an entirely new breed of infrastructure that goes beyond the traditional focus on roads and utilities.
In a recent commentary, Bill DeRoche, Mark Stacey, and Grant Wang of AGF Investments said “the sheer size of the opportunity at hand isn’t the only aspect worth noting. What should stand out to investors just as much is how this pledge – and others from around the world – differ in scope from most large infrastructure initiatives of the past.”
They said that while governments still allocate a fair amount of money to repair and expand traditional infrastructure such as roads, bridges, railroads, ports and airports, they also commit a significant amount to "new wave" projects aimed at promoting economic activity.
Already, the Biden administration has promised US$65 billion to build reliable high-speed Internet over broadband infrastructure and $ 75 billion to modernize power infrastructure, moving away from fossil fuels as part of the new energy plan. At the same time, an additional US$15 billion is earmarked for electric vehicles and the infrastructure required to power them.
“[P]erhaps the most important question for investors is how best to navigate the growing universe of infrastructure possibilities at hand,” they said, grouping the opportunities into several categories.
Under the broad heading of digital infrastructure, they included three related functions: telecom towers, data centres, and cloud services. While most investors don’t yet appreciate the business of building and maintaining cell towers to be leased to the world's largest telecom operators, the AGF analysts said this type of B2B relationship is now common in most of North America and Europe, generating multiple real estate investment trusts (REITs) with matching billions of dollars in revenue and market capitalization.
Additionally, more and more REITs and businesses have been focusing on owning or leasing real estate space for use as data centres. Aside from encompassing a diverse range of customers, the contracts associated with such agreements typically include services that generate additional revenue, such as power and cooling systems.
With respect to cloud services, they said many companies have been migrating from "on-the-premises" servers to database hosting and cloud computing services sold and maintained by the world's most renowned technology giants. Revenues from such services are growing to account for an increasing share of tech titan’s overall sales by percentage.
Meanwhile, the second broadest asset category of the new wave, renewable energy infrastructure, encompasses two subcategories: renewable energy utilities, which generate and sell power to one of multiple sources such as hydro, wind and solar resources; and renewable energy equipment such as solar panels, wind turbines and hydrogen cells, which have seen a dramatic rise in production in recent years.
Beyond those two renewable categories, the commentary touched on green infrastructure services, which include makers of electric vehicle batteries, as a fast-growing area that offers unique potential opportunities.
“[I]nfrastructure is a growing potential opportunity for investors, not just in size but in scope as well,” they said. “And while traditional assets like roads, bridges and pipelines are still central to the theme, it may be the new wave of cell towers, wind farms and data centers that will keep infrastructure portfolios on a more solid footing in the future.”