Right now, everyone seems to want to buy shares in companies connected to artificial intelligence. Investors are piling into stocks like Microsoft and Nvidia as AI increasingly looks like the future of everything.
As Warren Buffett says, though, investors pay a high price in the stock market for a cheery consensus. As a result, I’m looking elsewhere for investment opportunities.
AI issues
There are two main reasons I’m staying away from AI for the time being. I find it difficult to predict with confidence what the future will look like and stocks in this sector look very expensive to me at today’s prices.
With Microsoft, for example, I find it difficult to know how much ChatGPT will add to its business. I’m unsure whether it will give Bing an edge against Google, or how much value it will add to the company’s office applications.
Nvidia’s GPU business looks more predictable, but the company has a market cap of $1trn and produced $3.8bn in free cash last year. AI demand is clearly a big tailwind, but I don’t see any margin of safety in today’s share price.
Renewable energy
Instead of AI, I’m looking at renewable energy. The stocks have gone out of fashion lately, but the underlying case for investors is still there and I think that creates some good opportunities.
The outlook for renewable energy seems much more predictable for an investor like me than AI. And share prices also seem much less demanding right now.
As things stand, if governments are going to meet their climate commitments, they’re going to need two things – copper and cash. And that’s where I’m seeing opportunities at the moment.
Copper
The outlook for renewables isn’t totally set. But it seems increasingly clear the future will involve more electric vehicles and an increase in wind and solar energy generation.
All of these point to increased demand for copper. EVs use roughly 3.5 times as much copper as internal combustion engine vehicles and both wind (4x) and solar (10x) generation involves more copper than coal generation.
Despite this, shares in copper mining companies have been falling. The Glencore share price, for example, has fallen by almost 20% since the start of the year, largely due to lower copper prices in anticipation of a recession.
In the short term, there’s a risk that might continue. But for the long term, decarbonisation targets cause me to think demand for copper will be strong and companies like Glencore will do well.
Cash
I’m fairly confident that transitioning to renewable energy is going to take copper. But I’m almost certain it’s going to take a lot of cash.
That’s where firms like Berkshire Hathaway come in. Warren Buffett’s company has a utilities subsidiary with the cash to invest in building out the infrastructure needed to support carbon reductions.
Unlike other regulated utilities, Berkshire’s operation is part of its overall tax return. So the company is in a stronger position than its rivals to benefit from tax incentives when it comes to investments in renewables.
There’s a risk the company’s ability to do certain deals will be limited when Buffett isn’t in charge any more. But I think the shift to clean energy offers some excellent growth prospects.
