About this episode
Morgan Stanley’s Europe Telecom Analyst outlines three factors pointing to a boom, the obstacles to overcome and the associated industries most likely to benefit. ---- Transcript ----- Welcome to Thoughts on the Market. I'm Emmet Kelly, head of Morgan Stanley's European Telecom team. Today, I'll be talking about the rise of data centers in Europe. The subject of data centers has, until now, largely been confined to the U.S. However, we believe that this is all about to change; and we also think the market significantly underestimates the size and scope of this potential growth in Europe. Why do we believe that the European data center market is set for such strong growth? Well, we've identified three reasons. The first reason is cloud computing. The primary driver of data center demand today is cloud and digitalization. Cloud represents the lion's share of data center growth in Europe on our numbers. Roughly 60 percent of growth by 2035. The second driver is AI. What's interesting is training AI models needs to be done within a single data center, and that's driving demand for large data center campuses across the globe. The third driver is data sovereignty. Data sovereignty is becoming increasingly important to both companies and also to consumers. Essentially, consumers want their data to be stored at home, and they want this to be subject to local law. A common parallel I've received is: would you want your bank account to be stored in a different country? The answer is probably no. And therefore, we believe that data will be increasingly near-shored across Europe So what's limiting European data center growth today? There are a number of hurdles in place and these bottlenecks include energy, capital, planning permission, and also regulation So how do we get around that? Well, having chatted with my colleagues in the utilities and renewables teams, it's been quite clear that Europe needs to invest a lot of money in renewable energy, up to 35 billion euros over the next decade in Europe. This will bring a lot of onshore wind, offshore wind, solar and hydro energy to the market. In terms of the big data center markets in Europe, we've identified five big data center markets, commonly referred to as FLAP-D. Now this acronym does not roll off the tongue, but it does stand for Frankfurt, London, Amsterdam, Paris, and Dublin. Today, there are constraints in three of those markets, in Ireland, in Frankfurt and also in Amsterdam. We therefore believe that London and Paris should see outsized growth in data centers over the next decade or so. We also believe we'll see the emergence of new secondary data center markets. So, who stands to benefit from the explosive growth of European data centers? Among the key beneficiaries, we would highlight the picks and shovels. I'm talking about electric engineering, construction. I'm talking capital goods. We've also got the hyperscalers, the large providers of cloud computing and storage services. And then there is the co-locators as well. Beyond this, it's also worth looking at private capital and private equity companies as being positively exposed too. Thanks for listening. If you do enjoy the show, please leave us a review on Apple Podcasts and share thoughts on the market with a friend or colleague today.