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Artificial intelligence (AI) is no longer just for tech behemoths — it’s sprinkling its magic dust across a myriad of industries, creating unexpected winners in the stock market.
Just as we need to eat to survive and function, advanced AI systems require substantial electricity to operate. From this background, the reliability of the electricity supply is increasingly highlighted as a critical vulnerability within the AI ecosystem.
One ASX-listed company that could benefit from this trend is IPD Group Ltd (ASX: IPG), a distributor of electronic and automation systems and solutions across Australia.
Could this under-the-radar ASX small-cap stock be the surprise superstar of the AI revolution? Let’s dive into the potential of IPD Group.
Power shortages
We often hear about semiconductor chip shortages driven by the AI boom and how it is benefitting the likes of Nvidia Corp, Taiwan Semiconductor Manufacturing Co Ltd, and equipment maker ASML Holding NV.
However, Tesla Inc (NASDAQ: TSLA) boss Elon Musk believes power shortages are likely to be the next wave ahead of us. In an interview in March 2024, as part of the Bosch Connected World conference, he said:
The constraints on AI compute are very predictable… A year ago, the shortage was chips, neural net chips. Then, it was very easy to predict that the next shortage will be voltage step-down transformers.
Then, the next shortage will be electricity. They won’t be able to find enough electricity to run all the chips. I think next year, you’ll see they just can’t find enough electricity to run all the chips.
To make things worse, the developed world is already suffering from an inadequate supply of electricity due to ever-increasing energy demand and a slow transition to environmentally friendly energy sources.
The Australian Energy Market Operator (AEMO) warned of the potential risk of blackouts in NSW and Victoria in its May 2024 report, as highlighted by The Australian.
How is IPD Group’s business going?
IPD Group — founded more than 70 years ago — specialises in distributing electrical and automation solutions in Australia. It leverages renowned global brands like ABB Ltd and General Electric Co.
Its services encompass power distribution, industrial control, renewable energy solutions, and testing. More recently, the company expanded into solar energy, aiming to become a one-stop shop for all photovoltaic (PV) system needs ranging from PV equipment and services through the acquisition of Addelec.
In May, IPD Group provided a bright outlook for FY24, as summarised by my colleague James.
The company expects to report earnings before interest, tax, depreciation, and amortisation (EBITDA) between $39 million and $39.5 million, implying a 42% growth from a year ago at the midpoint. These projections exclude costs from the acquisitions of EX engineering and CMI Operations.
IPD Group CEO Michael Sainsbury believes FY24 has been a transformative year for the company, including major acquisitions. He said:
It has been a transformative year for IPD with the completion of two strategic acquisitions, EX Engineering and CMI Operations.
Merging our Addelec and Gemtek businesses has significantly enhanced our EV infrastructure team and we are capitalising on the growth in the market by securing a number of major projects during the year, including the electrification of Australia’s largest bus depot.
How cheap is this ASX small-cap stock today?
The IPD Group share price dropped by approximately 20% from the 52-week high of $5.42 in February this year. As the chart below shows, the IPG Group share price has been hovering between $4 and $5 for the last 12 months after more than quadrupling since its initial public offering in December 2021.
IPD Group shares are trading at a price-to-earnings ratio of 21x based on its reported earnings for the last 12 months to December 2023.
I think IPD Group has the potential to benefit from anticipated power shortages caused by the ongoing AI revolution, as well as electric vehicles and green energy initiatives.