IT Consulting is Not Having a Good Time

**Tyler Crowe** (0:03)
The SaaS Apocalypse was the wrong apocalypse. Today on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time Fool contributors, Matt Frenkel and Jon Quast. So we're gonna get into the kind of decline, I guess, if you will, of the IT services consulting industry over the past couple of years based on Accenture's earnings that were released earlier today. And we're also gonna do something a little bit different. It's a special message from Motley Fool at the end here, but we're gonna start today with a recent report on how climate could be a much bigger factor for data centers than originally thought. Now, Matt, you originally brought this idea to the table with us. So what was the market missing about data centers that this report was bringing out?

**Matt Frankel** (0:55)
Yeah, so there's a study by First Street that was released today. It analyzed 97 different data center markets around the world. So the headline is that nearly 90% of our global data center capacity today, not what's being built, is at an elevated risk from climate-related hazards. Think flooding, think windstorms, wildfires.
So most underwriting, when you're buying insurance for real estate, it still uses historical data, which isn't doing a good job of predicting how climate events perform today. I know Jon lives in Florida. This is why a lot of insurers have exited Florida, because the past-looking data isn't doing a good job. So data centers are generally expected to operate for 20 to 30 years. So this could become a big problem, especially as we rely more heavily on data centers for all of our AI, infrastructure needs.
Some of the most exposed markets are international, like Asia Pacific is the worst. But Northern Virginia, which we would call the data center capital of the United States has an above average level of exposure here. So here's the key takeaway, and this is confirmed by separate research, not just this study. So by 2030, more than half of data center hubs are going to find their water supplies stressed due to their cooling demand. Data centers produce a lot of heat. They actually create what are known as heat islands by warming land around them by as much as 16 degrees in documented cases.
Now, all of this can be mitigated at least on the building level. You could build buildings to be flood resistant and something that you see all the time in Florida. You can see power sources being upgraded. You can see cooling systems. But the stress on the supporting infrastructure, the power grids, the roads, the water supply in the local area, it's a real problem that's being overlooked.

**Tyler Crowe** (2:35)
This is definitely a topic that's been bubbling up from time to time and manifesting in various ways.
Also not mentioned in their report, and I think we're all hinting at it too, is that data centers are really expensive. So the cost of these and getting them right makes a lot of sense. You're saying flood-resistant buildings and whatnot. But I'm thinking of Metta's Hyperion Data Center, which is being built in Northeast Louisiana. That's expected to be a $200 billion facility. So if you have to insure a warehouse, it's maybe a few million dollars, it's one thing. But $200 billion insurance or trying to mitigate that risk when you're doing construction is a big deal. Because over the next 20, 30 years, who knows what's going to happen. So I have a two-part question for you both.
Is there a specific part of the market within this AI infrastructure, data center buildout, that you see this report actually impacting? And then on a scale of one to ten, ten being like the most actionable, how actionable is this to investing in that specific market?

**Jon Quast** (3:44)
Well, let me just start with the one to ten scale. In isolation, I would say this report from First Street is actionably a one.
I don't want to say that there's nothing wrong here with the climate whatsoever, or anything wrong with the study, but let's be clear. First Watch, it's on a mission to connect climate and financial risks together. That's why it exists as a research firm. It doesn't surprise me that it's sounding the alarm a little bit here on preparedness for climate risk. Some of the key constituents here would actually push back, including some of those who are building the data centers, saying, we're very aware of the climate risks, and we're already taking measures to counter those risks. So I don't think that there's anything really new here personally from the First Street Report. Now, that said, I mean, there is a huge buildout trend, and there are lots of constraints that we're running up against. And it's not just climate related. I mean, you look at just the land issue that it takes. We need more data centers for AI, or at least they want to build more data centers for AI.