The picks and shovels of the AI boom: One of the ASX's biggest AI winners

Artificial intelligence and semiconductor stocks are all the rage right now, especially after Nvidia wowed the market with another blowout earnings report last week.

Amid all the hype around AI, it's probably a good time to be in the picks and shovels business like chipmakers, technology services and consulting, data centres, engineering and utilities.

Rather than looking at things more broadly, I wanted to take a deeper dive into one of the best performing names in the ASX small to mid cap space – Southern Cross Electrical Engineering (ASX: SXE). More specifically, I wanted to look at:

• Recent profit guidance and contract awards

• Timing of its recent outperformance

• Key announcements from peers

That said, if you're after something more broad, my colleague Carl Capolingua wrote about the 12 ASX stocks that are leading Australia's AI revolution earlier this week.

Southern Cross Electrical at a glance

Southern Cross Electrical's services cover the full project lifecycle from initial design through to installation, commissioning and ongoing maintenance across three broad market sectors of infrastructure, commercial and resources. Here are some of the interesting snippets from its first-half FY24 results:

• Revenue breakdown: Resources (36.3%), Commercial (33.3%) and Infrastructure (30.3%)

• Long-standing clients: Seven major clients including Woolworths and BHP accounted for 46% of total revenue in FY23

• Growth: Over the past seven years, the company has grown revenues from $200 million in FY17 to a forecasted $500 million in FY24

• Recurring revenue: Approximately 37% of FY23 revenue was from recurring works

• Order book: Infrastructure now makes up over half of the company's order book

Share price performance

Southern Cross Electrical has performed quite strongly over the short-to-medium term.

• Year-to-date: +79%

• 1 Year: +131%

• 3 Year: 193%

As far as the past year is concerned, the stock only started to rally around mid-March. While peers like Nvidia and NextDC started to move a little earlier, posting meaningful gains from early January.

Southern Cross Electrical (Blue), Nvidia (Green) and NextDC (Red) | Source: TradingView

Despite all the tailwinds for Southern Cross Electrical, the stock surprisingly sold off following its half-year FY24 results on 27 February. It finished the session down 5.3%.

The breakaway

The stock started to rip higher around mid-March, coinciding with a long list of awards in data centre, building and battery sectors. Once one announcement dropped, many followed.

• 20 March: Data centre and resource awards over $70 million including an electrical design and construct package with NextDC

• 16 April: Data centre and building awards circa $50 million including works for NextDC and J Hutchinson

• 6 May: Battery energy storage system awards circa $160 million for Synergy, also the largest initial award by value in group history

• 6 May: Upgraded FY25 EBITDA guidance to 'at least $48 million' vs. consensus expectations of $43.2 million

• 13 May: Upgraded FY25 EBITDA to 'at least $53 million' with confidence "this growth sustainable with expectations of further earnings growth in FY26 and beyond."

NextDC timeline

The above contract awards imply a pretty strong relationship with NextDC, which is also experiencing a massive growth-spurt amid unprecedented customer demand.

The company's contracted utilisation was 106% as of 31 December 2023 – meaning the data they've locked in exceeds its built capacity. In its half-year FY24 earnings report, the company said its pipeline had exceeded 1GW for the first time on record. To add some perspective, its contracted utilisation for the half was 140.9 MW with 53.4MW of capacity in development.

To support this immense demand, the company raised $1.3 billion in mid-April to expedite the development of its infrastructure across Sydney and Melbourne.

Putting it all together: You can see the sequence of events for Southern Cross Electrical, where the company/share price started to gather momentum after all the bumper announcements from the sector and NextDC. The share price has run up pretty hard, so most of these above dynamics have likely been priced-in. The stock has pulled back around 10% from recent all-time highs, so it will be interesting to see if it can stabilise and kick on.