Could This Be the Most Underrated Infrastructure Play of the Decade? (Hint: It's Not a Data Center REIT)

Nvidia (NASDAQ: NVDA) is the poster child for the artificial intelligence (AI) revolution that is unfolding globally. Since it makes the chips that power the computers where AI "lives," that makes sense. But the AI buildout involves way more than just computers.

Here's an exciting AI infrastructure story unfolding behind the AI headlines.

Nvidia is winning today, but for how long?

Nvidia currently appears to hold the pole position in producing the computer chips that power artificial intelligence. Wall Street is well aware of this fact. The stock has risen a massive 25,000% over the past decade and makes up a whopping 8% of the S&P 500 (SNPINDEX: ^GSPC).

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Nvidia's price-to-earnings (P/E) ratio is currently below its five-year average for this valuation metric. That might lead some to suggest it is attractively priced today. However, the P/E is roughly 55x right now, which is high on an absolute basis. The average P/E for the S&P 500 index is 29x (which happens to be historically high for the index).

The problem is that Nvidia is the industry leader today, but there's no guarantee it will remain so in the future. During the internet build-out, Yahoo! was the leader in web searching until it was surpassed by Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google. Nvidia's industry dominance could easily change as the AI buildout continues to roll along.

AI needs to live somewhere

What's interesting about AI is that the computers that run Nvidia's chips have to live somewhere. That's led to a rapid growth in demand for data centers, which are specially designed buildings that house computer servers. That's been great news for data center REITs, as well as for companies like steel maker Nucor (NYSE: NUE), which manufactures building components, and industrial giant Eaton (NYSE: ETN), which sells power management products.

You can invest in the development of data centers in several different ways. However, the demand spike occurring now will eventually flame out, if past technology revolutions are any guide. So going back even further in the chain, to electricity, may make even more sense. AI needs power to operate. The demand for power grows with each new data center that gets built. As long as data centers remain open, they will require power, so the growth in electricity demand won't be transitory.

You could buy individual electric utility stocks to capitalize on the growth in electricity demand that is taking shape. But the nature of electric utilities is that they are mostly regional businesses. A simpler option is to purchase an exchange-traded fund (ETF) that specializes in the sector. Two well-diversified options are the Vanguard Utilities ETF (NYSEMKT: VPU) and the Utilities Select Sector SPDR ETF (NYSEMKT: XLU).

They are roughly similar ETFs. For example, their expense ratios are 0.9% and 0.8%, so they cost about the same amount to own. Their dividend yields are both about 2.6%, so they both generate around the same amount of dividend income. Performance-wise, they essentially come out the same, too. They are also both sponsored by well-respected financial industry giants.

How big is the opportunity?

According to giant U.S. utility NextEra Energy (NYSE: NEE), a holding in both ETFs, electricity demand increased by a total of 9% between 2000 and 2020. Demand is projected to grow 55% between 2020 and 2040, which is a steep change for the power industry. AI is a big part of the story, so don't feel like you've missed out on the AI infrastructure boom. It is still playing out in the utility sector, and it will have major implications for the industry for the next decade (or longer). The easiest way to play it could be the Vanguard Utilities ETF and Utilities Select Sector SPDR ETF.

Reuben Gregg Brewer has positions in Eaton Plc and Nucor. The Motley Fool has positions in and recommends Alphabet, NextEra Energy, and Nvidia. The Motley Fool has a disclosure policy.