Hello, Reader.
Lemons and blue jeans might seem to have as little in common as a top sirloin and artificial intelligence. But they all share one common trait: a nearly unquenchable thirst.
Each of them owes its existence to spectacular volumes of water.
Growing just one lemon consumes about 13 gallons, while producing one 16-ounce steak requires about 475 gallons of water.
And according to Levi Strauss & Co. (LEVI), producing a single pair of its iconic 501 jeans consumes nearly 1,000 gallons of water.
AI’s water consumption is not as easy to calculate as a top sirloin’s, but it is enormous… and increasing rapidly.
Although AI does not directly consume water, the data centers that power AI technologies do. Most of that H2O finds its way into the cooling systems that prevent data center server racks and components from overheating. The centers also use water indirectly from their electricity use.
On average, an Alphabet Inc. (GOOGL) data center consumes 450,000 gallons of water a day. But some of the newest centers consume 10 times that volume, as do some of the newest semiconductor fabs.
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) is building a state-of-the-art chip-fab in Arizona that will guzzle 4.75 million gallons of water a day – enough to supply about 1.5 million average homes.
And the nebulous force of “the internet” cannot operate without millions of physical servers humming along 24 hours a day inside the world’s data centers. Thus, these servers rely on and consume prodigious volumes of electricity and water.
And most folks don’t realize how water-intensive GenAI programs like ChatGPT can be. Shaolei Ren, an associate professor of electrical and computer engineering at University of California, Riverside, conducted research to calculate that impact. He and his team observed…
GPT-3 needs to “drink” (i.e., consume) a 500ml bottle of water for roughly 10-50 responses, depending on when and where it is deployed. These numbers may increase for the newly-launched GPT-4 that reportedly has a substantially larger model size.
The tech industry’s large and growing water consumption has not yet attracted the same level of attention – or concern – as the industry’s growing energy consumption. But as tech companies expand their data center footprints worldwide, water consumption will become an increasingly challenging issue for them, and an increasingly expensive one.
But despite the early signs of water challenges, none of the major tech companies are hitting the “pause” button on their data center expansion plans, which means their collective water consumption is on the verge of erupting like “Old Faithful.”
Google’s water consumption, for example, jumped 17% in 2023, compared to the year before.
Synergy Research Group predicts worldwide hyperscale data center capacity will almost triple within the next six years. The expanding number of new facilities will account for some of that growth, but the technical evolution from CPUs (central processing units) to GPUs (graphics processing units), like the ones Nvidia Corp. (NVDA) produces, will deliver most of that capacity boost.
GPU servers have become the industry standard for data centers. They deliver vastly superior performance for AI-related processing than the legacy CPU servers that most existing data centers use.
Inconveniently, GPUs consume about four times more electric power than CPUs, which means they also generate significantly more heat than CPUs. Furthermore, as AI technologies become more widely adopted, they will require ever more data centers with ever more powerful processors.
Consequently, data center cooling systems must become more robust. Water-cooled systems are the obvious choice. Air cooling can do the job in some cases, but because water’s thermal capacity is 3,000 times higher than air’s, it can absorb more heat than air, using less energy and at lower cost.
To be clear, the data center industry will not cause any immediate harm to the global water cycle.
The industry’s collective water consumption has not yet risen to alarming levels. But the more stressed the world’s water supplies become, the greater the likelihood that water costs will rise for the data center industry.
This relationship is just starting to create compelling opportunities for investors. In fact, I recently recommended an emerging leader in the water-handling business for the oil & gas industry to my Fry’s Investment Report subscribers.
I believe this company is in an excellent position to capitalize on a powerful opportunity that will continue to gain momentum. To learn more about this recommendation, join me at Fry’s Investment Report today.
Now, let’s look at what we covered here at Smart Money this past week…
Smart Money Roundup
My Urgent Election Debrief
After last week’s election results, I recorded a message for investors. I want to assure you not to get overly caught up in the historical connections between politics and financial markets. While political factors can influence markets, I believe the most important thing is to focus on the dominant market trends of the moment.
What a Trump Presidency Means for U.S. Chip Manufacturing
Intel finds itself running for its life, struggling to keep up with competitors like the hare chased by hounds in an old Aesop fable. The Biden administration passed the CHIPS and Science Act in 2022 to help America’s last high-end chipmaker, but with Donald Trump returning to the White House, that plan is now uncertain.
This Industry Is a “Buy” for the Next Few Years – Here’s Why
With Donald Trump on his way back to the White House and Republicans retaking control of the Senate, the president-elect will likely be able to implement his economic agenda with minimal opposition over the next two years. This has significant implications for the U.S. economy and financial markets, so you are probably wondering what sectors will thrive over the coming years. I believe that this industry will.
Behind the “Trump Bump”: How Much Could Stocks Rise in 2025?
We observed two forms of the “Trump Bump” during Trump’s first term, according to InvestorPlace analyst Luke Lango. They include a boost for corporate earnings through more pro-growth policies and tax cuts, and a rise in valuations thanks to increased investor confidence in the economy. In Sunday’s guest issue, Luke breaks down these two factors and the pathway he sees for the election-driven rally to push stocks higher in 2025.
Looking Ahead
In your next Smart Money, I will continue to examine data center water consumption in the context of global trends… and highlight a U.S.-listed company that is recognizing the growing opportunity – and attempting to capitalize on it.
Regards,
Eric Fry, Smart Money
