The AI revolution will be a continuing focus for investors, given its transformative potential. However, market winners and losers can change quickly in this rapidly evolving field.
Earlier this month, Nadella appeared on a radio show with venture capitalists Brad Gerstner and Bill Gurley. The wide-ranging interview, lasting more than an hour, covered artificial intelligence. But while the interview was largely optimistic about the prospects for broad AI, one topic came up that seemed to dampen sentiment around Nvidia.
When asked if Microsoft was still as supply-constrained for Nvidia chips as it has been throughout 2024, Nadella noted:
Since that statement, Nvidia stock has been somewhat weak. This is not surprising. Since 2023, there has been much more demand for Nvidia’s chips than it can supply, resulting in significant revenue increases and high margins for Nvidia’s graphics processing units (GPUs). Microsoft is Nvidia’s largest customer by far, with some estimating that Microsoft accounted for 20% of Nvidia’s sales over the past year.
In recent earnings calls, Microsoft indicated that supply was constrained; Otherwise, the growth of the Azure cloud, especially for AI workloads, would have been faster. Now, Nadella’s suggestion that supply constraints may be coming to an end could mean one of three things: slowing demand for AI; Chip supplies are improving; Or a little bit of both.
There have been some rumblings that improvements to large AI language models may be difficult to achieve, and the pace of innovation may slow. These rumors have been denied by some major industry participants, but they could have an impact on AI chip purchases. After all, if expected returns on AI experiences and applications are slow to emerge, demand may slow. Even if Microsoft has a lot of demand from enterprise customers, it’s likely that smaller buyers of GPUs, such as Mini-cloud CoreWeave or others that provide power to riskier AI startups, may see less demand.
However, most companies in this space are still very optimistic about the demand for AI. One other possibility is that Microsoft sees its internally designed Maia accelerators reaching larger volumes in mid-2025. Microsoft has been well behind other cloud giants who have been designing their own custom chips for years that they use internally so as not to rely on Nvidia’s expensive GPUs. . This is why Microsoft buys so many more Nvidia GPUs than its own products Cloud computing competitors.
However, Microsoft first introduced its Maia accelerators and Cobalt central processing units (CPUs) at the end of 2023, just one year ago. So, with Microsoft having a year to hone its design and perhaps ramp up new manufacturing supplies, Nadella may see Maia chips growing in larger quantities in the new year, easing its chip constraints.
Nadella’s comment about power constraint seems to indicate that demand is still there, at least for Microsoft’s enterprise customer base, and this may be more of a downward spiral for Maia than a decline in demand for AI chips.
As for the AI opportunities that could present themselves in 2025, let’s turn to the statement that Microsoft is “constrained by power.”
It is assumed that the United States will have unprecedented demand for electricity in the coming years, with growth in this demand exceeding that of the past ten years, due in large part to artificial intelligence data centers.
What types of clean energy can be brought in quickly to meet demand? Renewables will undoubtedly have a role here, but renewables do not operate 24/7, and solar panels and wind farms may be set up in remote locations that need to be connected to the grid.
In addition, some of the biggest winners in 2024 have been nuclear stockpiles. Microsoft itself has signed a deal to bring power from the closed Three Mile Island facility to feed its AI data centers for 20 years. However, closed nuclear facilities take a long time to become operational. Three Mile Island itself won’t be able to return to service until 2028. So, imagine the cost and time required to get the new nuclear facilities fully operational. With nuclear product inventories skyrocketing this year, there may be some disappointment in the near future.
Famous hedge fund manager David Tepper He also does not believe that the artificial intelligence revolution can be saturated with nuclear energy for all of these reasons. This leaves only one other option for rapid deployment in existing or easy-to-build facilities: natural gas. Last September, Tepper warned: “If you want to meet the energy needs of artificial intelligence, you are going to have to use natural gas.”
This sentiment has been echoed recently by Morgan Stanley Energy sell-side analyst Stephen Baird. Last year, Baird predicted that nuclear stockpiles would rise, and they did. This year, Baird expects natural gas stocks to benefit from the inevitable demand to provide power for artificial intelligence data centers. He even sees new natural gas facilities being built on the same land as AI data centers and connecting directly to them, thus bypassing the grid and the lengthy transfer approval process that comes with traditional energy deals.
If natural gas sees a new spike in demand, the largest stocks in the sector could do very well.
If Nvidia is the perfect AI stock, EQT Company (NYSE: EQT) It may be the perfect 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 the largest acreage and lowest drilling costs in the Appalachian Basin, EQT further reduced its breakeven costs by acquiring Equitrans midstream. The deal closed at the end of July.
The acquisition of Equitrans transforms EQT into the only vertically integrated company in the basin, not only in production but also in gathering, processing, storage and pipelines. This acquisition should be beneficial in several ways. EQT will now not have to pay markups to the pipeline operator to withdraw gas, cutting breakeven costs to the lowest level among its peers. In fact, EQT says that after the acquisition, the break-even price is now about $2 per million British thermal units (MMBtu), which is less than about $2.50 for EQT as a standalone company and roughly equal to the lowest prices. It was seen for natural gas during the pandemic, as well as during the recession earlier this year.
So, while most natural gas companies would have to hedge natural gas prices to protect their solvency in a low-price scenario, EQT says it will hedge much less after 2025 when its existing hedges expire. This is because EQT is confident that it can break even at low prices, while competitors cannot afford to operate at these levels. Not having much downside protection means EQT can achieve higher prices if the price of natural gas rises, as it will not have an upside cap. If the AI revolution, coal substitution, and LNG export markets increase, natural gas prices could be significantly higher over the rest of the decade.
While natural gas prices have nearly doubled from their lows to just under $4 per million British thermal units today, they topped $9 when Russia invaded Ukraine. Trading at just 18 times 2025 earnings forecasts, EQT could be one of next year’s biggest “AI winners” — and perhaps even bigger than Nvidia in terms of stock appreciation.
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Billy Duberstein and/or its clients have positions at Microsoft. The Motley Fool has positions in and recommends EQT, Microsoft, and Nvidia. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has Disclosure policy.
Microsoft CEO Satya Nadella said something that might be bad news for Nvidia but great news for this commodity stock in 2025. Originally published by The Motley Fool
