By now, we’ve all heard about how data centers connected to artificial intelligence (AI) are sending demand for electricity soaring. But what has been largely ignored is how these same data centers are driving up demand for scarce water supplies, as well.
Water is used by data centers to cool computing equipment, as well as in most forms of power generation. A number of these vast computing facilities are located in water-stressed regions, including parts of Virginia that are suffering from droughts.
Microsoft (MSFT) says that 42% of the water it consumed globally came from “areas with water stress” in 2023.
Data Centers' Thirst for Water
Already, water consumption by dozens of facilities in Virginia’s “data center alley” has jumped by almost two-thirds since 2019! The vast warehouses full of computers and networking gear used about 1.85 billion gallons of water in 2023 versus 1.13 billion gallons in 2019.
Overall, U.S. data centers consumed more than 75 billion gallons of water in 2023. And demand for computing infrastructure is set to explode higher due to artificial intelligence.
Officials in Loudoun County, Virginia - located in “data center alley” - have said the amount of land in the county dedicated to data centers had more than doubled since 2019, with a substantial additional area under construction.
Bank of America estimated in November that data centers are already the 10th-largest water consumer in the U.S. The Prince William County Service Authority, a local utility provider in Virginia, told the Financial Times that the combined water consumption of the 35 operational data centers in the county in 2024 amounted to about 6% of the authority’s maximum-day demand. The number of facilities has risen 59% since 2019.
If we expand our view out around the world, there are other factors driving demand for water higher, too.
Another Geopolitical Headache
These other factors include a growing global population and intensifying conflicts in the Mideast.
The CEO of Spanish utility group Cox, Nacho Moreno, recently said to the Financial Times that he expected global water treatment needs to increase annually at a rate of 10% to 15%: “The water market is one that grows at a double-digit compounded annual growth rate, so anywhere between 10% and 15%, which means that in four or five years, it doubles its size.”
At the same time, Moreno expects the gap between water availability and demand to widen by 40% each year!
Conflicts in the water-scarce Middle East are driving demand for solutions that shore up water supplies. For example, if Saudi Arabia’s desalination plants were to blow up, the country would run out of water within a few hours.
So water security in the current geopolitical climate is something which is key. That’s why Cox has developed floating desalination plants in the sea that can be moved.
Finally, more and more water is needed for human consumption and to irrigate agricultural land as temperatures rise and the number of people to feed around the world grows.
More Water Woes
The sustainability of water has become an increasingly urgent global challenge. It is estimated that half of the world’s population already faces severe water scarcity during at least part of the year. Data published last year by the World Resources Institute warned that $70 trillion — or 31% of global gross domestic product — could be exposed to high water stress by 2050.
Considering human nature, this will lead to conflicts. I still remember famed investor Jim Rogers warning about water wars in the Middle East over a decade ago.
Villanova University’s Francis Galgano identified nine international river basins as flashpoints in which conflict is either already taking place or the potential for armed conflict is high. These included the Nile Basin in Africa, the Tigris-Euphrates River Basins of southwestern Asia, and the Helmand and Harirud Rivers along the border of Afghanistan and Iran.
Even here in the United States, we’re seeing seven states battling over the dwindling waters of the Colorado River.
So even though water scarcity is a problem Wall Street loves to ignore - it’s too long-term - I believe it’s a great sector in which to invest.
One Water Investment to Consider
One interesting company in the water space is Veralto (VLTO), which is focused on “safeguarding the world’s most vital resources”. More than 80% of its sales are in the water, food and beverage, and pharmaceutical industries. It was a spinoff from Danaher (DHR), and began to trade publicly on Oct. 2, 2023.
Its main business is manufacturing water testing and treatment tools. But it also makes package labeling and tracking technologies and tests that ensure, for example, that each tube of lipstick and bucket of paint is the same color.
The scale of Veralto’s water testing and treatment platforms is huge. Its Hach water-testing arm is four to five times larger than the closest competitor.
And it’s looking to grow in related areas, considering acquisitions in filtration membranes. It is even looking at a potential takeover of DuPont's (DD) water division. Veralto generates ample free cash flow, so it’s less dependent on borrowing to fund dealmaking, and thus less constrained by higher interest rates.
Veralto is a great long-term business. VLTO stock is already up 50.9% over the past year, and there is much more to come. It's a buy below $118.
