3 in 3: Follow the Power, AI Healthcare Spend, and a New View of Value

Data centers are starting to pop up in unusual places. AI efficiencies are leading to more, not less, spending on healthcare. And traditional measurements of value are breaking down. I'm Jim Lydotes and these are our three points in three minutes. So let's flip over the timer and let's go. 

First, data centers are springing up in unusual places. From an investment perspective, you want to follow the power, not the zip codes where everyone else is already focused. Our Grassroots Research team recently wrapped up their one-year follow-on survey to the AI data center build out to see what's changed over the last 12 months. While there had been a huge focus a year ago on specific areas like Northern Virginia, Dallas, Atlanta. Today what we're hearing is that companies are looking to go wherever there is power and connectivity, even if it's not where you traditionally find data centers. Softbank has recently broken ground on a data center in Piketon, Ohio. This is a project that is going to bring 35,000 construction jobs to a county of only 27,000 people. So you really want to work backwards from where the power is to figure out where the investment opportunities lie. 

Second point is that AI may actually increase healthcare spending, not reduce it. And that's a bit of a different dynamic than what you will see in other sectors. What I've been hearing increasingly from my healthcare team is that any savings from AI, whether it's faster drug discovery or better trial design, those savings aren't being kept. They're being reinvested back into research and development. If AI improves success rates and shortens timelines, the ROI on developing a new drug goes up. And when returns go up, companies spend more, more trials, more data, more complexity. All this investment is going to lead to much more demand for tools and for CROs. 

And finally, with the market continuing to focus on capital spending budgets, investors need a different way to measure value. Price to earnings, price to book. These don't properly estimate how cheap companies are relative to the capital that they can deploy. We've developed something that we call excess capital yield. Recently wrote a paper on it. This metric adds back borrowing capacity. It adds back the free cash flow being generated by the business over the next couple of years. I think it's a better gauge of how expensive or cheap a company is. And as the market continues to focus on how much companies are spending, we found this one metric best captures the optionality around what they could do next. 

So that's our three points in three minutes with a little sand left in the bottle. Have a great week and we'll see you back here next time. 

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