Could AI power National Grid shares significantly higher in the years ahead?

Artificial intelligence is going to lead to a surge in power demand in the coming years. So what does this mean for National Grid shares?

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One sector that’s been hot in recent weeks is utilities. That’s because there’s a theory that artificial intelligence (AI) could lead to soaring demand for electricity over the next decade. Could AI put a rocket under National Grid (LSE: NG.) shares in the coming years? Let’s discuss.

Surging demand for power

Looking ahead, AI is going to lead to a vast build-out of data centres (an investment theme that really interests me right now).

And the theory is that the increase in data centres is going to propel demand for electricity higher.

According to analysts at Goldman Sachs, data centre power demand could increase at an annualised rate of 15% between 2023 and 2030.

They reckon utilities companies that provide power should benefit:

While investor interest in the AI revolution theme is not new, we believe downstream investment opportunities in utilities, renewable generation and industrials whose investment and products will be needed to support this growth are underappreciated.

Goldman Sachs analysts

The impact on National Grid

So, what does this all mean for National Grid?

Well, the way I see it, higher demand for power could potentially impact the company in several ways.

National Grid’s core business is transmitting electricity. So, on the plus side, higher demand for power should translate to more electricity flowing through its grid, which should lead to a higher level of revenue for the company.

It’s worth noting here that National Grid has substantial operations in the US. And this is where a lot of data centres are going to be built in the years ahead (since most of the biggest tech companies are in the US).

On the downside, however, National Grid’s current electricity grid may not be able to cope with the extra demand for power. So, the company may have to upgrade its infrastructure. This could be costly and limit profit growth in the short term.

I’ll point out that earlier this year, National Grid CEO John Pettigrew said that the grid was becoming “constrained“, and that “bold action” was needed to create a network able to cope with dramatically growing demand.

We are at a moment in time that requires innovative thinking and bold actions to create a transmission network for tomorrow’s future.

National Grid CEO John Pettigrew

Weighing this all up, it’s hard to know at this stage if National Grid will be a major beneficiary of the AI boom. In the long run it should be. But in the short to medium term, it may not… it could, however, be the companies involved in the grid upgrade that benefit more.

Worth buying today?

Either way though, the stock strikes me as a solid investment to consider today.

The company’s valuation is reasonable at the moment. Currently, National Grid’s price-to-earnings (P/E) ratio is about 15.

Meanwhile, its dividend yield is attractive at about 5.2%.

A risk is higher interest rates. If rates were to climb from here, I’d expect the stock to come under pressure because the company has a lot of debt on its balance sheet.

All things considered though, I think National Grid shares have considerable appeal. Analysts at Barclays have a share price target of 1,365p.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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