NVIDIA’s Hidden Gem: The ‘Secret Royalty’ Stock That Could Fund Your Retirement

The teaser ad claims that since 2016, this investment has outperformed nearly all other assets, including gold, oil, healthcare, and real estate. According to the ad, the key is the company’s unique role in the upcoming global transfer of over $85 trillion.

It also suggests that this $15 stock could provide ‘AI income’ for life, offering 270 times more in ‘AI royalties’ than NVIDIA.

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A new “NVIDIA’s Secret Royalty” introduction is pushing the ad again recently.

Here’s the phrasing that grabbed our attention in the most recent Behind the Markets promotion:

 It all started with the introductory email…

Then, when you click through to the ad’s “presentation”…

This is yet another promotion focused on the significant number of data centers in the Virginia suburbs of Washington, D.C. A decade ago, there were concerns about potential overbuilding in the area. However, it has since expanded rapidly, with demand soaring. This growth has increased stress as these data centers consume vast amounts of energy, especially with the rising use of NVIDIA’s energy-intensive AI accelerator chips.

For various reasons, the region around Loudoun County has become home to the highest concentration of data centers globally, hosting nearly all major tech firms and colocation providers. According to some reports, these data centers handle around 70% of the world’s internet traffic in one capacity or another, making them a significant indicator of the extensive investments to boost AI capacity and the substantial energy needs these facilities create.

Here’s a glimpse of the introduction…

Right, it seems like this company offers a substantial dividend… suggesting we might be looking at energy MLPs… but let’s explore what else the ad reveals:

So, indeed, at its core, this is yet another pitch emphasizing how AI is consuming vast amounts of global energy… and the necessity to produce more:

While AI drives notable growth in energy demand, keeping expectations grounded is essential. The increased need for electricity to support AI and data centers is significant but less dramatic than some claims suggest. The rise in demand, while substantial, will result in a gradual doubling of power usage.

While data centers are expected to consume up to 50% more power over the next few years, this translates to a modest rise in the overall U.S. electricity consumption—from roughly 4% in 2022 to an estimated 6% by 2026. Of course, this number might fluctuate depending on factors like grid resilience and future demand, but it’s far from a crisis requiring twice our energy supply.

The core issue isn’t an overwhelming surge in consumption; our energy infrastructure must be fully prepared for this change. The U.S. grid is strained, with limited resilience capacity, especially in areas where coal plants have been retired and nuclear facilities are being phased out. Even a slight uptick in demand—driven by AI, electric vehicles (EVs), and re-industrialization—poses challenges when the system has stagnated for decades.

The real tension stems from competition over available power. States and power customers are already battling for new energy sources and transmission infrastructure, which explains why the grid remains outdated and inflexible in many regions.

Yet, this transition could be advantageous for power producers. Regions might adopt a more favorable stance with a growing interest in expanding energy capacity and enhancing grid infrastructure.

Unregulated generation companies could charge higher rates, and after years of being sidelined, utilities are experiencing a resurgence of interest. Companies with surplus generation capacity from nuclear or renewable sources stand to gain the most, especially as data centers seek eco-friendly solutions to meet their net-zero commitments.

But let’s get back to the ad…

The largest pipeline MLP, Enterprise Products Partners (EPD), moves about 7.4 million barrels of oil, liquids, and refined products, with 12.2 million barrels per day, including natural gas, in 2023. Kinder Morgan (KM) handles roughly 40% of the natural gas produced in the U.S., but its volumes don’t come close to those figures. The same goes for large players like OneOk (OKE) and Plains All America (PAA). The copywriter pulled the 750 million figure from another source or made an error with the decimal point, considering that the total U.S. oil production is only around 20 million barrels daily.

And then there’s the matter of the extreme return projections…

The argument here suggests that because oil and gas production is limited—mainly due to government restrictions on fossil fuels and social pressure against oil companies—combined with rising demand for electricity driven by AI, we might see significant price increases.

While that could be possible, it’s essential to recognize that oil and gas prices sometimes react slowly. Historically, significant price spikes and drops have occurred, but these corrections often happen quickly. For the most part, aside from a few extreme instances (like the spike in 2007 and the collapse in 2008, or the downturn in 2014-15 and the COVID-related fluctuations), WTI crude oil prices have mostly stayed within a range of about $45 to $105 since 2004. While this range shows volatility, shifting from $50 to $100 doesn’t represent a “parabolic” increase. Future movements are uncertain, but it’s worth noting that oil prices aren’t directly linked to electrical power demand.

The argument here suggests that because oil and gas production is limited—mainly due to government restrictions on fossil fuels and social pressure against oil companies—combined with rising demand for electricity driven by AI, we might see significant price increases.

While that could be possible, it’s essential to recognize that oil and gas prices sometimes react slowly. Historically, significant price spikes and drops have occurred, but these corrections often happen quickly. For the most part, aside from a few extreme instances (like the spike in 2007 and the collapse in 2008, or the downturn in 2014-15 and the COVID-related fluctuations), WTI crude oil prices have mostly stayed within a range of about $45 to $105 since 2004. While this range shows volatility, shifting from $50 to $100 doesn’t represent a “parabolic” increase. Future movements are uncertain, but it’s worth noting that oil prices aren’t directly linked to electrical power demand.

The grid has suffered mainly due to its age, inadequate maintenance, and the failure to extend new transmission lines rather than a lack of oil refineries or drilling. However, it’s essentially a result of the same NIMBY (Not In My Backyard) mentality, along with states and localities having significant control over permitting, which hinders the development of various energy infrastructure projects.

Currently, just under 600 active rigs are in the U.S., with about half located in the Permian Basin, which aligns with the earlier claims.

Now, let’s look at more from the ad:

And now we come to the crucial clue…

It needs to be clarified where the idea that oil is crucial for keeping the AI industry running comes from. While oil is vital for much of the global economy, it isn’t a primary source of electricity. In fact, natural gas and coal are far more efficient for that purpose. Oil is mainly used in transportation and for producing petrochemicals.

To ensure AI and other energy-intensive technologies continue to thrive, the focus should be on something other than transporting more oil. What’s truly needed is the movement of more natural gas and the construction of additional natural gas power plants. Other options for increasing electricity production, such as small modular reactors or improving energy storage for renewable sources like wind and solar, either take too long to build or must be more cost-effective or technologically ready.

Also, it’s important to note that U.S. natural gas and crude oil markets don’t always move in tandem. One reason for this is the current surplus of natural gas, driven by fracking, which has outpaced our ability to export it due to limited LNG (liquefied natural gas) capacity. For reference, a 20-year price chart for WTI crude oil and Henry Hub natural gas reveals that while geopolitical events or economic downturns can affect both markets (such as the spike in energy prices following Russia’s invasion of Ukraine), they aren’t closely linked because they serve very different functions and aren’t interchangeable.

Yet, Jovine seems fixated on oil. He goes on in the ad:

Clearly, he’s referring to a pipeline company. And yes, major pipeline firms function like “toll roads” for the oil and gas industry — nearly all oil and gas in the U.S. is transported by pipeline because it’s the most efficient way to move these resources. While pipeline companies aren’t directly tied to commodity prices (they charge per unit), their stocks often fluctuate with the prices of the underlying commodities. For instance, when oil prices plummeted in 2014 and 2015, it signaled lower demand, which dragged down pipeline company valuations. Similarly, when oil demand collapsed during the COVID-19 shutdowns in 2020, these companies suffered again. Like toll roads, pipelines rely on consistent traffic, and revenue and profit margins take a hit when that traffic slows. This leaves pipeline companies with less cash to distribute as dividends. Since many investors hold these stocks primarily for the dividend, price swings can be dramatic in response to changes in the oil and gas markets.

AI may influence the natural gas market, at least marginally, and this has sparked interest in gas producers and pipeline operators over the past year. The surge in power demand has also increased interest in utilities, nuclear power companies, and similar industries. Investors are typically quick to react to these market shifts, but they often overreact, at least in the short term. And the rise in energy demand is one of those trends driving market shifts.

He mentions “royalties,” which always catches my attention.

Companies like Taiwan Semiconductor, Alphabet, and NVIDIA don’t directly consume significant oil. Instead, they are major electricity users, relying heavily on natural gas, nuclear power, hydropower, or coal, depending on where their facilities are located (they use some solar and wind energy, but not in large volumes yet, except in certain regions).

More from Jovine…

Who could this be? Based on the limited clues — including one that seems inaccurate — the best guess is Energy Transfer LP (ET). This is one of the most extensive midstream partnerships in the U.S., well-positioned in various end markets, including power generation, and it has transported about 2.2 million barrels of natural gas liquids per day.

Perhaps more significantly, Energy Transfer has been one of the most volatile large master limited partnerships (MLPs) over the past few decades. Looking back to the 2016 lows for all partnerships, several have outperformed other sectors like healthcare, energy, real estate, gold, and even the S&P 500. However, Energy Transfer has significantly outperformed those sectors. The orange line in this chart represents their total return, while the purple line shows just the price, excluding distributions or dividends — and it’s pretty impressive:

However, as I mentioned, Energy Transfer has also been one of the most volatile pipeline stocks due to various factors. This includes its numerous acquisitions during growth and certain midstream value-added services that are more unpredictable than simply transporting gas and oil. Because of this volatility, it has sometimes been viewed as relatively risky and tends to trade at a lower valuation (higher dividend yield) than many of its larger competitors.

With more volatility in a stock, it’s easy for charts to misrepresent long-term returns. Those remarkable gains were only achievable if you purchased near the bottom in 2016, mainly because Energy Transfer experienced a sharper decline than other pipeline stocks during the oil crash of 2014-2015.

However, Energy Transfer appears to be relatively average for a pipeline/midstream master limited partnership (MLP). It has a market capitalization of $50 billion, a current yield of just under 8%, and has performed exceptionally well since the lows of 2016 and 2020. It’s important to note that such lows benefit more volatile companies. Since the decline in pipeline stocks (and many others) in 2020, Energy Transfer has outperformed average returns but hasn’t been the standout leader.

Energy Transfer’s share price can exhibit significant volatility, making it an appealing buy during downturns. However, it is one of the least favorable options during market highs when a correction is imminent (even though predicting such corrections is impossible). I prefer to avoid excessive risk-taking within the MLP sector. This is partly due to my dislike of the K-1 partnership tax reporting and partly because these partnerships have intricate accounting practices involving substantial depreciation and maintenance costs that are sometimes capitalized. Moreover, I have yet to develop much expertise in this field, so I lean toward investing in an ETF when I find the pipeline sector attractive.

I genuinely appreciate Energy Transfer’s innovative approach, which distinguishes it from many traditional pipeline companies. Through supply agreements with natural gas power plants, they are significantly involved in various sectors, including natural gas liquids, propane shipping, and electricity generation. Their diversified operations encompass a substantial crude oil and natural gas collection and transport pipeline network. For those who can handle its more volatile share price, Energy Transfer has proven to be a solid long-term investment. They’ve also strategically acquired valuable assets, enhancing their portfolio.

One key reason I am interested in owning pipelines is the inherent challenge of constructing new ones across much of the country. With many regions facing obstacles to building new pipelines or altering existing routes, the ownership and maintenance of the current pipeline infrastructure can become a profitable venture, especially as demand continues to rise.

That said, I generally refrain from engaging in direct comparisons between companies in the MLP space. Many firms are well-managed, including non-MLP companies, which can be attractive if you’re wary of the tax implications or benefits associated with partnerships. For those interested in specific MLPs, Energy Transfer (ET) and Enterprise Products Partners (EPD) are great starting points. Suppose you prefer corporations, which usually offer lower yields compared to partnerships. In that case, you might consider Kinder Morgan (KMI), OneOK (OKE), or Enbridge (ENB).

In summary, the investment Dylan Jovine calls the “Last Retirement Stock You’ll Ever Need” is likely Energy Transfer LP (ET). While it’s a solid, high-yield investment, its current valuation is average. The stock tends to be more volatile than its peers in the pipeline sector, often dropping more during market downturns and bouncing back higher. This means you can achieve significant returns with ET, but typically only by buying when the market is down, and low sentiment isn’t the case right now.