The artificial intelligence (AI) revolution will be an ongoing focus for investors, given its transformative potential. However, the winners and losers in the market could change quickly in this rapidly evolving space.
Earlier this month, Nadella appeared on a podcast with venture capitalists Brad Gerstner and Bill Gurley. The long interview, more than now, was about AI. But while the interview was largely bullish on the outlook for AI in general, one topic came up that seemed to put a damper on the sentiment around Nvidia.
When asked if Microsoft was still limited to Nvidia chip offerings as it was throughout 2024, Nadella said:
Since that statement, Nvidia stock has been somewhat weak. It is not surprising. Since 2023, there has been much more demand for Nvidia’s chips than it could supply, leading to large increases in revenue and high margins for Nvidia’s graphics processing unit (GPU). And Microsoft has been Nvidia’s biggest customer by far, with some estimates that Microsoft accounted for 20% of Nvidia’s sales last year.
On recent earnings calls, Microsoft noted that it had been limited in supply; otherwise, its growth in the Azure cloud, especially for AI workloads, would be even faster. So now, that Nadella has hinted that supply constraints may be coming to an end could mean one of three things: AI demand is slowing; the chip offer is better; or a bit of both is happening.
There have been some rumbles that improvements to large AI language models may be more difficult to come by, and the pace of innovation may slow down. These rumors have been denied by some major industry participants, but they could have an effect on the purchase of AI chips. After all, if the projected returns on AI experimentation and applications are slow to show, demand could slow down. Although Microsoft has a lot of demand from enterprise customers, it’s possible that smaller buyers of GPUs, such as CoreWeave mini-cloud or others that provide capabilities to riskier AI start-ups, may see less demand .
However, most companies in the space are still quite bullish on the demand for AI. Another possibility is that Microsoft sees its in-house designed Maia accelerators growing to larger volumes by the middle of 2025. Microsoft was far behind other cloud giants that have been engineering their own custom chips for years and that they use internally to not be dependent on Nvidia’s expensive GPUs. That’s why Microsoft buys a lot more Nvidia GPUs than its own cloud computing rivals.
Microsoft, however, first introduced its Maia accelerators and central processing unit (CPU) Cobalt right at the end of 2023, a year ago. So with a year for Microsoft to refine its design and perhaps grow a new manufacturing supply, Nadella may just see Maia chips ramping up to higher volumes in the new year, easing its chip limitations.
Nadella’s comment on the energy limitation seems to indicate that the demand is still there, at least for Microsoft’s enterprise customer base, and this could be more of a Mayan ramp than a drop in demand for AI chips.
As for the AI opportunities that could present themselves in 2025, let’s go to the phrase that Microsoft is “power constrained”.
It has been postulated that the United States will have unprecedented demand for electricity in the years ahead, with the growth of that demand surpassing that of the last 10 years, largely due to AI data centers.
What types of clean energy can quickly meet demand? Renewables no doubt have a role to play here, but renewables don’t run 24/7, and solar panels and wind farms can be built in remote locations that need to be connected to the grid.
Also, some of the biggest winners of 2024 were nuclear stocks. Microsoft itself signed a deal to bring power from the closed Three Mile Island facility to power its AI data centers for 20 years. However, closed nuclear facilities take a long time to operate. Three Mile Island itself will not be able to return to service until 2028. So, imagine the cost and time delay to get the new nuclear facilities fully operational. With the nuclear stocks that have gone down this year, there could be some disappointment in the offing.
Famous hedge fund manager David Tepper he also does not think that the AI revolution can be satisfied by nuclear for all these reasons. That leaves only one other option to quickly deploy in existing or easy-to-build facilities: natural gas. Back in September, Tepper warned: “If you are going to meet the energy needs of what they need for AI, you have to use natural gas.”
This sentiment was echoed recently by Morgan Stanley energy retail analyst Stephen Byrd. Last year, Byrd predicted the increase in the nuclear stockpile, which has come. This year, Byrd expects natural gas stocks to benefit from the inevitable demand to power AI data centers. He also sees new natural gas plants being built on the same land as AI data centers and connecting directly to them, thereby removing the grid and the lengthy transmission approval process that comes with traditional energy businesses. .
If natural gas sees a new surge in demand, the sector’s biggest stocks could do very well.
If Nvidia is the quintessential AI stock, EQT Corporation (NYSE: EQT) it could be the quintessential natural gas stock. EQT has amassed the largest acreage in the Appalachian Basin’s Marcellus and Utica shale formations, which are home to the largest low-cost natural gas reserves in the United States.
With more acreage and lower drilling costs in the Appalachian Basin, EQT reduced its break-even costs even further with the acquisition of midstream company Equitrans. The deal closed at the end of July.
The Equitrans acquisition turns EQT into the only vertically integrated play in the Basin, not only with production, but also with gathering, processing, storage and pipelines. This acquisition should be beneficial in many ways. EQT will now not have to pay pipeline operator margins to extract its gas, reducing its break-even costs to the lowest of its peer group. In fact, EQT says that after the acquisition, its break-even price is now about $2 per million metric British thermal units (MMBtu), which is down from about $2.50 for EQT as a corporation autonomous and almost equal to the lowest prices. seen for natural gas during the pandemic, as well as during a downturn earlier this year.
So while most natural gas companies have to hedge natural gas prices to protect solvency in a low-price scenario, EQT says it will hedge far less after 2025 when its current hedges expire. This is because EQT is convinced that it can break even at low prices, while competitors cannot afford to operate at those levels. Not having as much negative protection means that EQT can realize higher prices in the event that the price of natural gas rises, since it will not have capped upside. And if the AI revolution, coal substitution and LNG export markets increase, natural gas prices could be substantially higher for the rest of the decade.
While natural gas prices have nearly doubled their lows to just under $4 per MMBtu today, they went over $9 when Russia invaded Ukraine. Trading at just 18 times expected 2025 earnings, EQT could be one of the biggest “AI winners” in the coming year — perhaps even bigger, in terms of stock appreciation, than Nvidia.
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Billy Duberstein and/or their customers have positions in Microsoft. The Motley Fool has positions and recommends EQT, Microsoft and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Microsoft CEO Satya Nadella just said something that could be terrible news for Nvidia, but great news for this commodity stock in 2025. was originally published by The Motley Fool
