If artificial intelligence is the new gold rush, then Rolls-Royce Holdings PLC (LSE:RR.) may find itself selling the shovels.
The engineering group’s power systems division, best known for the diesel and gas engines that keep hospitals, ships and military bases running, is increasingly finding a new market in data centres; the sprawling, energy-hungry warehouses that make AI possible.
Citi’s analysts have crunched the numbers and see potential for a decent boost to the share price if this trend gathers pace. Their US team expects investment in data centres by the so-called “hyperscalers”, the likes of Amazon, Microsoft and Google, to rise by 45% a year until 2030, reaching an eye-watering $4.4tr.
Rolls-Royce’s Power Systems business is unlikely to match that breakneck growth.
The company’s backup power units, after all, are built to last two or three decades, unlike the servers inside data centres, which become obsolete within five years. Citi assumes Rolls’s sales to the sector will grow between 10% and 25% annually.
That range matters. A single percentage point of growth, Citi calculates, moves the fair value of the shares by 10p to 15p. So if sales tick along at the low end, investors might shave 50p off their valuation.
But if growth pushes up towards 25%, there could be another 100p of upside to the current price.
For a company still basking in its turnaround story, data centres could become a quietly powerful new engine.