Nvidia had a chilling effect on these power stocks. Are investors being too harsh?

By Britney Nguyen

Nvidia's new, more efficient racks could lessen the need for products that use cold water to remove excess heat from data centers

Nvidia CEO Jensen Huang said the upcoming Vera Rubin AI platform won't need chillers in data centers.

CEO Jensen Huang says Nvidia's upcoming chip platform won't need water chillers. That's good news for energy efficiency, but potentially bad news for a crop of power and utility companies that had once been seen as bets on the steep energy requirements of the artificial-intelligence boom.

As a result of Huang's commentary, shares of Johnson Controls (JCI) and Modine Manufacturing (MOD) have fallen sharply since Monday, while shares of Trane Technologies (TT) and Carrier Global (CARR) have seen lesser drops.

These companies make technologies for heating, cooling and ventilation. Some of their products include "chillers," which are used to remove the excess heat in data centers that gets generated by racks and racks of servers. Chillers circulate water or another coolant through pipes to absorb heat, then transfer it to a cooling tower or other system to remove it.

But as AI systems become more advanced, maintaining a cool data center is getting tougher and more intensive. Nvidia (NVDA) tried to solve that issue with a liquid-cooling approach that absorbs heat at the source using cold plates. That then gets moved through a heat exchanger and finally to a cooling loop. Going directly to the chip makes the heat-transfer process more efficient and allows for warmer water to be used, according to Nvidia, which uses the liquid cooling system in its GB200 NVL72 rack-scale system.

The market generally understands that AI consumption and demand will increase with improvements in cost and efficiency, Jefferies analysts wrote Wednesday. But if graphics processing units made by Nvidia, custom chips such as Google's tensor processing unit and emerging technologies like quantum computing become more energy efficient, "this would have significant negative implications" for power producers, the analysts said.

That's why Huang's latest comments have some investors spooked. He said Nvidia's new Vera Rubin artificial-intelligence platform has twice as much power as its Grace Blackwell predecessor, but that the air flow for the system "is about the same, and very importantly, the water that goes into it is the same temperature," at 45 degrees Celsius.

"No water chillers are necessary for data centers," Huang said. "We're basically cooling this supercomputer with hot water."

See more: Nvidia CEO Jensen Huang delivers some good news for investors at CES

The comments are the "latest uncertainty for power & utilities," Jefferies analysts said in a Wednesday note. The team said in a note earlier this month that improvements to energy efficiency could be a "DeepSeek 2.0 Event" for the "AI and power demand bull thesis," referring to when the AI trade was rattled by a seemingly more efficient Chinese reasoning model a year ago.

The new concerns also cloud the outlook for independent power producers such as Vistra (VST), Constellation Energy (CEG) and Talen Energy (TLN), Jefferies said, as the regional transmission organization PJM Interconnection tries to ensure adequate electricity for data centers, which is sending residential electricity bills higher.

The bull case for power providers in the wake of Nvidia's latest announcement is similar to the bull case for chip stocks last year following the DeepSeek news: More efficient systems aren't necessarily a bad thing if they can lower the bar for access and increase AI demand overall. But the Jefferies analysts noted heavy uncertainty now, so it remains to be seen if the market would quickly embrace this sentiment.

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Baird analyst Timothy Wojs said he didn't see Huang's comments as a major risk to near-term financials, but he expects there will be "incremental concerns" about orders for chillers, especially in the second half of this year. Huang's comments raise questions about the long-term use of chillers in data-center infrastructure, Wojs said in a Tuesday note, as it's understood that the sorts of liquid-cooling technologies Nvidia teased can work at higher temperatures that will be generated by more powerful systems.

While data centers have been a prime source of revenue and order growth for HVAC companies in the past 12 to 18 months, the pullbacks in the stocks earlier this week show that investors have concerns, Wojs said, even though he saw the fears as overblown.

-Britney Nguyen

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01-08-26 1553ET